Tuesday, December 16, 2008

Depression Economics

Over at TPM Cafe they are discussing of Paul Krugman's recently re-released book "The Return of Depression Economics".  Brad DeLong, Dean Baker, Paul Krugman, and Robert Reich are leading the discussion.  Brad DeLong has several insightful posts as is his norm but this sentence jumped out at me: 
"We clearly need to separate capital adequacy regulation from rating agencies that can be gamed in order to eliminate regulatory arbitrage..."

Everyone is constantly calling for regulation to prevent future crises, which is valid.  But we also must look at the extent to which the present regulatory framework fueled the crisis.  One of the things that has clearly emerged is that the securitization of mortgages was favored from a regulatory standpoint as opposed to the traditional model where a bank both originated and held the mortgage.  This in large part fueled the leveraging of the financial sector.  That and the fact that every banker in America was seemingly stupid.

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