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The Timing of Lost Recovery

June 18th, 2009 · 12 Comments

Ezra on financial regulation:

Word is that Congress won’t really begin considering these reforms until the end of summer or the beginning of fall. That means they’re not likely to come to the floor until the end of the year or quite near it. That means banks and other affected companies will have months to organize against the provisions they consider most onerous. That means the economy will have time to grow a bit, and the terror following Lehman’s collapse will have receded from our memories, and the financial sector and the politicians who protect it will be able to argue against shackling a growing economy with new regulations without being laughed out of the Congress.

So the solution is to… shackle it with new regulations before it starts growing again. I don’t mean to be glib, because there’s a legitimate point in there about politics and timing, but the reason these groups will be able to make that argument is that, you know, there’s sort of something to it. I think we can safely say that all the relevant players are sufficiently chastened at the moment that regulation designed to curb excessive risk-taking isn’t going to provide a whole lot of benefit over the next six months, so doing a rush job gets you a suboptimal set of rules hitting when they’re least needed and most likely to have a near-term deleterious effect. I’d want to be fairly sure about having the politics gamed out right before urging a legislative blitz.

Also, much as I share Ezra’s cynicism about interest group politics, this is self-evidently a fairly undemocratic way to approach policy. “Quick, push it through before anyone has time to notice what we’re doing!” What are the criteria for determining when this is an acceptable approach to major legislation? When it’s a good bill designed by smart people?

Tags: Economics


       

 

12 responses so far ↓

  • 1 Neil the Ethical Werewolf // Jun 18, 2009 at 10:01 am

    the reason these groups will be able to make that argument is that, you know, there’s sort of something to it

    I think the idea is that these groups have gargantuan amounts of money to dole out in the form of campaign contributions. There really isn’t a huge amount of money sitting on the other side in support of more financial regulation. So the only time you’re going to get the right policy is when the pro-regulation forces have some sort of countervailing advantage. That time is short.

    And I don’t think Ezra’s saying, “Quick, push it through before anyone has time to notice what we’re doing!” (In any event, financial regulation is technical enough that no matter when you do it, hardly any non-expert will have any idea exactly what you’re doing.) The idea is just to do it at a political moment when the consequences of underregulation are fresh in everyone’s minds.

  • 2 Anthony Sorace // Jun 18, 2009 at 1:08 pm

    In normal times, we as a culture have an emotional reaction against the idea that having one large, opaque thing (the financial system) regulated by another large, opaque thing (the government) is any sort of win. Arguments which focus on “less regulation == more freedom == good” resonate well, quite apart from anything resembling facts or history, and it takes a lot more time and energy to explain (or understand) why proper controls ensure the system doesn’t go off the rails and, in the long term, benefit the economy overall. The emotional bias, combined with the complexity of the facts, seems to create a breeding ground for one-way hashes. Certainly the current debate around economic arguments for stimulus have been filled with one-way hashes. It’s a lot easier to claim that increased government spending must come at the cost of suppressed private spending than it is to explain why that isn’t so *in some cases*, for example.

    Right now, though, we’re not in “normal times”. That (largely justified) emotional bias has been matched by an emotional reaction against the chaos and destruction we’re seeing right now. The problem is that lessons learned quickest fade the soonest. What I believe Ezra is saying is that we should address the legislation before the lessons we’ve learned fade and the normal emotional bias reasserts itself.

    I think Ezra’s next paragraph makes it quite clear what he’s hoping we can bypass, and it isn’t proper examination of the issues: “partisanship, lobbyists and electoral incentives”. Sadly, there’s a crossover point after which we get little benefit from additional examination and are harmed by the ever-growing influence of those forces Ezra identifies.

  • 3 Michael B Sullivan // Jun 18, 2009 at 1:27 pm

    Right now, though, we’re not in “normal times”. That (largely justified) emotional bias has been matched by an emotional reaction against the chaos and destruction we’re seeing right now. The problem is that lessons learned quickest fade the soonest. What I believe Ezra is saying is that we should address the legislation before the lessons we’ve learned fade and the normal emotional bias reasserts itself.

    This is basically the argument for the Patriot Act, right? That under normal circumstances, we’d be reluctant to give up a huge chunk of civil liberties, but these aren’t normal times, we’ve got an emotional reaction, and so we should hurry up and use that emotional reaction to bypass our better sense?

  • 4 Michael B Sullivan // Jun 18, 2009 at 1:28 pm

    Sorry, that blockquote plus italics thing is much less readable than it was in my head.

  • 5 Christian W. Chandler // Jun 18, 2009 at 2:31 pm

    Sonia Sotomayor is a long-term, heavy drinker. Just look at her face.

  • 6 Emma Zahn // Jun 18, 2009 at 5:30 pm

    @Christian Chandler – or she could just be insulin resistant, same result.

  • 7 Anthony Sorace // Jun 19, 2009 at 11:10 am

    The arguments sound similar on the surface. But the argument for the Patriot Act was that we should use the current shock to allow an emotional bias to overrule reason, whereas the argument for this reform is to use the current shock to counter a pre-existing emotional bias.

    Again, I’m not (and I don’t believe Ezra is) suggesting we bypass reason or debate. A rubber-stamp congress was a disaster in the beginning of the decade, and I don’t believe it’d be any different now. But, with the report (take it as the opening position) published, let’s begin the healthy process of discussion and debate now, and treat it as a priority, rather than waiting some months while the bankers ensure the leases on their representatives are up to date.

  • 8 Michael B Sullivan // Jun 22, 2009 at 2:17 pm

    The arguments sound similar on the surface. But the argument for the Patriot Act was that we should use the current shock to allow an emotional bias to overrule reason, whereas the argument for this reform is to use the current shock to counter a pre-existing emotional bias.

    I guess I just don’t buy that as a difference. It’s not like we are ever in an emotionless, purely rational frame of mind. There will always be emotional biases for and against things — it’s not a matter of “emotional bias now” versus “no emotional bias then.” It’s a matter of “particular emotional bias now” versus “different emotional bias then.”

    And if we’re generally interested in minimizing emotional biases, it’s incredibly difficult for me to believe that “right after a shocking, scary event” is the less emotional time.

  • 9 bago // Jun 25, 2009 at 12:28 am

    I think we can safely say that all the relevant players are sufficiently chastened at the moment that…

    They’re paying themselves record bonuses?

  • 10 Barry // Jun 25, 2009 at 12:42 pm

    Julian: “I think we can safely say that all the relevant players are sufficiently chastened at the moment that regulation designed to curb excessive risk-taking isn’t going to provide a whole lot of benefit over the next six months…”

    Julian, where the f*ck do you get that idea? These guys are already well on the pushback road (politically), and as pointed out, are sucking more money into their own pockets. They took 10x the government money that the auto industry did, with ~1/10 the vituperation (Wall Street guys having their pay limited for still being employed is Evul; autoworkers being f*cked is Good).

    If anything, the past six months show that these guys are incredibly hard to pin down, and have power even beyond what leftists were saying.

    As for regulations inhibiting the growth of financial industries, that is a Good Thing. Haven’t you noticed that we went through a period of deregulation, in which which the creative genius of the financial guys was actually unleashed – to suck money into their pockets, and leave us holding the rubble?

    IMHO this is another thing which falls under the category of 21st Century Libertarianism do now.

    The Friedman/Greenspan School is now factually and intellectually dead; it didn’t survive reality (the zombie corpse, of course, will keep shambling due to inertia and the interests of rich men).

  • 11 Barry // Jun 25, 2009 at 12:50 pm

    Julian, I apologize for using ‘f*ck’.

  • 12 Barry // Jun 25, 2009 at 1:09 pm

    Michael, think of the argument being that we’ve seen a particular industry (a) demonstrate that in normal times they have the clout to (largely!) write the laws that they wish, and to weaken regulatory power,
    (b) demonstrate that market rationality/self-correction was most emphatically *not* a sufficient ‘regulatory’ tool ,
    (c) demonstrate a high degree of linkage, which leads to
    (d) demonstrate an ability to trash the financial system of the USA, and possibly the world (or at least as close to ‘demonstrate’ as we ever want to get…),
    (e) demonstrate that the surviving firms, leadership and traders are not chastened in the slightest.

    This leads to the obvious conclusion that we need to take advantage of – well, the FIRE sector’s rich criminality, and regulate the living f*ck out of them now.

    I expect them to slowly work their way out from under those regulations – after all, that was the main goal of the Reagan/deregulation/libertarian/Chicago School/Law & Economics/Friedmanian movement of the 70′s-2000′s. However, we could perhaps buy a few decades of good times. Just like with the New Deal reforms of banking, which worked fine, until the people who lived throught that period were replaced by fresh people who said ‘it’s different this time; those regulations were the product of a different age’.

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