Skip to footer

How regulators caused the bank meltdown

Conventional wisdom says that the economic meltdown happened because of lax regulations on the nation's largest banks. It may be just the opposite.

|
Frank Polich/Reuters/File
Protesters march past the Federal Reserve Bank in the financial district of Chicago in this file photo. Did federal regulations on banks cause the meltdown?
  • By Douglas French Guest blogger

In his “Business World” column for the Wall Street Journal Holman Jenkins highlights the book Engineering the Financial Crisis by Jeffrey Friedman and ex-Mises Fellow Wladimir Kraus. Jenkins writes,

Their work is refreshing for many reasons: It does not assume the housing bubble is the whole story. It allows that honest ignorance (especially about the interaction of complex regulations) might explain the behavior of bankers and regulators. It asks especially interesting questions about the triple-A mortgage derivatives at the heart of the financial meltdown.

The Basel banking regulations provided the incentive for bankers to load up on mortgage securities, which up to that point history had shown were very safe. Thus, the capital that regulators required to be held against these assets was tiny. Bankers acted logically by investing in what they thought (and importantly what regulators told them) were safe assets that they could grow their businesses with the least amount of capital required.

Messrs. Friedman and Kraus find no evidence for the popular theory that bankers acted recklessly because of Too Big to Fail incentives or because compensation packages induced them to be careless about long-run returns.

Jenkins even gets it right at the end, writing, “One solution is giving back to bank creditors the job of policing bank risk-taking. Roll back deposit insurance, for instance.”

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.
editor@csmonitor.com
Subscribe
Mark Sappenfield
Editor

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

Subscribe to insightful journalism

QR Code to How regulators caused the bank meltdown
Read this article in
https://www.csmonitor.com/Business/The-Circle-Bastiat/2012/0119/How-regulators-caused-the-bank-meltdown
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe