Larry, Larry, oh no, you gotta go
Leave aside for a moment the question of whether a market in which buyers have to be bribed to participate can really be described as “better functioning.”
And now, the throwdown:
America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. ... Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.
After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. ...
Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and pureed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.
But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie.
Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.
To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.
But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.
As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.
I suppose you could regard the whole process as a failure of central planning, where the planners, instead of being dull-eyed Stalinists in ill-fitting suits, were the best and the brightest, driven insane by greed, unlimited wealth, and testosterone MR SUBLIMINAL And hookers and blow not necessarily in that order.
And just like, say, the Soviet auto industry, our central planners actually subtracted value from their inputs; it would have been more cost-effective for the Russians simply to have sold the steel ingots, rubber, glass, and so forth on the open market, rather than process them into Zils, and GAZs, and Ladas. As Krugman says: More harm than good.
Why don't we just turn the banks into regulated public utilities?
NOTE Actually, thanks to ConnecticutMan, we know now that a turd can indeed be buffed, so there is hope for Geithner-san's plan. A turd buffed, however, remains a turd.