Bill Roper's Journal

As I was saying before LJ interrupted ...

What do I see as the two most significant regulatory failures leading to the current mess?

1. The blending of commercial banks, investment banks and insurance business in single, massive entities. I explained my views on this in a previous comment. The summary is this: each of them serves different purposes and different levels of risk. Blending them makes for inherent conflicts of interest among those levels. And the loosening of regulations made it easier for the banks to resolve the conflicts in favor of risking more rather than less.

2. The lack of regulation on derivatives. The new investment vehicles created by breaking up mortgage assets were inherently unstable. When the mortgagee holds the mortgage, it takes on the entire risk and is more careful of the mortgages it accepts. When the mortgagee breaks up the mortgage and pieces of other mortgages and sells them, the mortgagee has NO risk at all; it has money in hand to do it again. It's a Ponzi scheme, with the ones at the start getting all the benefits. This was the motive behind the extreme availability of sub-prime mortgages. For the folks at the head of the line, this was a sure thing.

I understand the attraction of a free market. It's great for those who win.

But I tend to distrust extremes. I believe in unchecked capitalism as much as I believe in unchecked communism -- neither works well for the majority of the society. Finding the right balance is, of course, the crux of the problem.

Starting with Reaganomics, we went to far to the side of no regulation. It's time to move back to the center, again.

Where I most agree with you is the start of your solution. The credit freeze is caused by lack of confidence, and lack of confidence happens when no one can figure out the worth of money instruments. And I'm not talking about credit freeze at the level of my credit card. I'm talking about the credit freeze at the level of commercial paper. That is more than a market correction. It's a fundamental blow to the entire economic system of this country. (And, increasingly, the world.)

So I'm glad we're all talking about fixing it.

Footnote: About the crazy credit spree of the American public. Yes, it was bad, and some of us said so all along. Smart people, prudent people, do not buy what they cannot afford. However, in their defense, I will point out that for the past 8 years, their government has told them and shown by example that we can decrease revenues while increasing spending and this is a Good Thing.

The moment I was most angry at President Bush? When his call to the American People to help with the war on terror and Iraq -- his call for them to do their part in supporting our troops -- was to go shopping.

No, I am not blaming Bush alone for the mess. But his bully pulpit certainly did nothing to stop it.

The angriest I've been with the Democrats? When they joined the Republicans to loosen the regulation on banks. (Well, actually, it was the passing of the Patriot Act, but that's not in the context of this discussion.)