I'm not exactly Niall Ferguson's biggest fan, so when I saw he and Ted Forstmann decided to weigh in on the financial reform debate, I was pretty excited. These two have written maybe the silliest piece I've read on the subject yet. They proceed from this assumption ...
We can choose any two of the following, but not all three: 1) efficient capital markets 2) no bailouts to big banks and 3) a depression-free economy.
...which is never justified, unless you consider it a bank bailout whenever the Fed cuts the interest rate. Not only do the authors believe that pursuing all three priorities is a bad idea ("not credible"), they seem to be arguing that the only thing that should be changed is the law around derivatives. They leave the rest of the sector to the winds, largely on the basis that the bills written to overhaul the financial system are too long.
It's clear they are not even in the same aisle as the facts, much less in the parking lot at the FactWay. They say, for instance, that the mortgage markets were the "most highly regulated sectors" of the financial world. Maybe they mean subsidized, but the fact remains that a huge number of the sub-prime mortgages that caused the housing bubble were sold by unregulated non-bank mortgage brokers. It was the Wild West out there. Then they question whether there is a correlation between excessive compensation and excessive risk-taking. Is that a debate that hasn't been resolved for them yet?
Finally, they ask once again "let us not believe we can abolish both bailouts and depressions." A concept which they still don't explain and seems to fall alongside the very convincing blackmail offered by Wall Street and its allies: If you won't bail us out, well, there's going to be a huge economic crisis. As we've seen, however, economic crises and bailouts go hand-in-hand quite well. There's no clear reason why a regulated market should be less efficient than the current system of virtual monopolies and asymmetric information, or that bailouts can be eliminated while still preventing recessions. Ferguson and Forstmann suffer from the soft mediocrity of low expectations, and it's not helping anyone.
-- Tim Fernholz
