Sunday, February 23, 2014

BANKS | Fed Showed Risk-Blindness

On March 22, 2008, I expressed concern about the cumulative impact of financial deregulation:

The post, which was widely read and a version of which also appeared on Huffington Post, refers back to the 1999 Financial Modernization Act, in which the US Congress took another step toward deregulation of the banks, removing more bricks from the wall between government-insured banks and the non-bank institutions.

I said the Economist magazine was correct in 1999 when it said that the implication of weakening the Glass-Steagall wall should be to extend the net covered by U.S. financial regulation.

The implication of a story in today's New York Times by Gretchen Morgenstern is that my thinking in March 2008 was on target. Financial regulators in New York and Washington at that time were dissing the "pessimists" who were concerned that banks were under-capitalized. The pessimists were worrying about the risky behavior of the unregulated sector of the economy and the porous nature of what was left of Sen. Carter Glass's wall in the Banking ("Glass-Steagall") Act of 1933.

(Rep. Steagall's part of Glass-Steagall is of course still with us–i.e., the FDIC. But the original idea was that government insurance of bank deposits was a trade for stronger regulation and a wall between banks and other, unregulated financial actors. Deposit insurance coverage has expanded in many ways but the regulation has evaporated.)

Here is Morgenstern's story, based on reviewing 2,000 pages of transcripts just released by the Fed.

Comment on CityEconomist Readership: The CityEconomist blog just passed 70,000 pageviews. The previous marker was 60,000 in October 2013, so that's 10,000 pageviews in four months, or 2,500 per month, roughly 100 per day. The blog was started in the first half of 2007. I did not post during a two-year break while I was working in Washington for the Joint Economic Committee, but the blog was open and the pageviews kept coming, so it is fair to pin the average pageviews per year at about 10,000. So the recent rate of viewership is three times the average over the life of the blog. Thank you for reading.