Treasury Secretary Henry Paulson has gone to greatpains to explain why
boostingthe Fed's powers to oversee financial institutionsis a good idea.
I've read the particulars, but Ihave to say I still don't see how it makes sense.
It sounds like he's reviving the idea of a DrugCzar, only with a different brain-addling threat. Thistime it's the Greed Czar, which I think is going to workas well as the Drug Czar thing did.
Other recent banking crises suggestinteresting ramifications for Paulson's proposal --some encouraging, some not. According to the
, during the near-collapse of
and anyone who dealtwith it, Fed officials called central bankers inNordic countries to compare notes on dealing with bankfailures.
Those countries were hit back in the early 1990s, when U.S.commercial banks and investment banks were still ondifferent tracks. It was also about the time thatJapan was experiencing the all-time banking trainwreck -- one that nearly two decades on we're still notconfident has finished burning.
Compare Finland's -- or Sweden's or Norway's -- GDPsince the early '90s with that of Japan's and you cansee Japan underperforming. In short, any centralbanker or regulator with a preponderance of Viking DNApunished failed banks -- took them over and leftstockholders dangling in the wind.
Japanese regulators bailed out banks and their shareholders -- and bailedthem out, and bailed them out, and so on.
I was a financial reporter in Japan during theearly '90s, so I can say, with the authority of anydisinterested witness to a train wreck, that Japan'sproblem wasn't entirely bureaucratic stupidity. Thelatticework of cross-shareholding that took nearly halfa century to weave into a tangled mess meant thatfailing banks would cause manufacturers' stock to fall-- which would pretty much put a bullet into the fabledJapanese economic animal.
There was talk in 1994 about securitizing bad bankdebt in Japan -- a Tokyo version of
American investment banks like
pushed the notion, andafter a month or so of consideration the idea wasdropped.
Maybe securitizing Japanese loans would haveworked (like in the U.S. in 1992) or maybe it wouldn't(like in the U.S. in 2007). But what the Japanesegovernment chose to do instead would never haveworked: it used public pension money to shore upstocks, banks or otherwise.
Here's why it didn't work: Foreign firms shortedstock-index futures, then arbitrageurs (again, largelynon-Japanese firms) made sure the indices themselvesmatched the futures at expiration. So stocks fellanyway; and Goldman and Morgan made a fortune anyway.
Among the lessons of that mess: markets andnationalism don't mix; and in times of deep crisis, itdoesn't pay to spare shareholders. Paulson has thatfirst lesson down pretty well, but the Bear Stearnsten-buck-a-share plan really makes me wonder about thesecond.
Like Bear shareholders, investors of Enron have beenseeking redress in the courts, with mixed results. Butconsider the cold-blooded response in Nordic countries-- and its subsequent results -- with the compassionatecorporatism of Japan -- and its results. Messy as itcan be, the court system offers a tidier boxing ringthan the Fed does for angry shareholders.
The mere perception of the $10-a-share price tagon Bear tells us it's a bailout. And sadly, perceptionis trumping reality in the markets these days. Onehopes that this perception isn't forcing somebureaucratic hands into placing a regulatory yoke ontobanks -- investment, commercial or otherwise.
Regulation is a tricky thing. It works bestgoverning conditions that the regulators bestunderstand. The catch is this: The more you understandthose conditions, the less they needs regulating. Andthe less you understand them, the more likelyregulation won't work.
The Treasury and the Fed can save themselves anawful lot of work simply by regulating less, anddemanding more disclosure. Free marketers who exclaimthat the market can take care of itself often overlookthe fact that this can only happen when the market canactually see itself, and what's happening inside it.
The whole credit crisis occurred not because therewas too little regulation, but because there wasn'tenough disclosure. We now know that exactly no oneknew what was going on. In the perfect world inside myopinions,
would havebought Bear for $2 a share, and also have beenrequired to disclose all its books for the world tosee.
Then we'd finally know whatwas going on. But what I'm hearing from SecretaryPaulson is that this was too much to ask. It was toomuch to ask in the past. And it will be too much toask from now on.