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  • Regulators, Risk and Roubini

    Via Greg Mankiw, Bentley University professor Scott Sumner writes on efficient-markets hypothesis (EMH):

    So the anti-EMH argument for regulation must be based on the following: bankers are irrational and make lots of foolish loans. Regulators are rational and can see that these loans are too risky, and can protect bankers from hurting themselves. At a theoretical level this doesn’t even pass the laugh test. But what happened in practice? What position did the “regulators” take in this crisis? First we need to define “regulators,” who are much more than just the low-paid Federal bureaucrats that oversee the banking industry. Regulators are the watchmen, those who watch the watchmen, and those who watch those who watch the watchmen. In other words:

    1. The President

    2. Congress

    3. The Fed

    4. The media

    5. Most academics

    6. Nouriel Roubini

    Guess how many of these institutions warned us about the sub-prime crisis. Now guess how many were encouraging banks to behave even more recklessly than they did. Unless we plan on making Roubini dictator of the world, there is zero evidence from the sub-prime crisis that simply giving regulators more power would have helped. And how do we know that even Roubini wasn’t just lucky, and might miss the next fiasco?

    Posted in Economics [slideshow_deploy]

    One Response to Regulators, Risk and Roubini

    1. Angry Dumbo says:

      Roubini was not shouting into a vacuum. Both Congress and Wall Street were aware of the potential fallout of defaulting subprime loans and the securities backed by them. Congress was too busy getting reelected and Wall Street could not afford to both publicly acknowledge the depth of this problem and avoid a panic.

      As the post implies it is hard to argue that further regulation could have prevented the current crisis if you acknowledge that Congress was made aware of the need for a bailout at least as far back as 2007 and chose not to act.

      http://www.washingtonpost.com/wp-dyn/content/arti

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