The NYT magazine featured a lengthy piece on financial regulation. Remarkably, it did not quote or cite a single person who saw the housing bubble and recognized its danger. The failure to include the views of someone who actually understood the economy makes the issues surrounding regulation appear far more complex than they are. There was very little problem in recognizing the housing bubble for any competent economist. There was an enormous divergence in house prices from their long-term trend with no remotely plausible explanation. The sort of reckless loans and over-leveraging that one expects in a bubble were also easy to see. The story of failed regulation was one of incredible corruption. The remarkable part of this story is no one is going to jail. In fact, no one is even losing their job (that is among the regulators -- tens of millions of ordinary workers who did nothing wrong are losing their jobs). Given such an outcome, economic theory predicts that when confronted with the next bubble, regulators will defer to the financial industry, recognizing that they will face no consequence from failing to do their job. It is amazing that this piece did not note this obvious point. It is also remarkable that the piece does not mention the idea of a financial transactions tax to rein in the industry. This idea has been promoted by at least four Nobel prize winning economists, including NYT columnist Paul Krugman. It's hard to believe that an NYT business reporter was unaware of it. A modest financial transactions tax could do an enormous amount to rein in the financial industry while having very limited impact on productive financial transactions. This is why it has been endorsed by many prominent political figures around the country and around the world.
--Dean Baker
