A Must Read on the Financial Crisis

Bethany McLean has a must-read article on Reuters about the role of the SEC's 2004 change in broker-dealer leverage requirements in the financial crisis.  The article thoroughly debunks the argument that "the SEC did it" by loosening broker-dealer deregulation. 

I'm really glad to see this article because there is so much sheer nonsense circulating around regarding the financial crisis and its causes. The "CRA-made-me-do-it" and the "it was the GSEs" arguments have been debunked in plenty of places, but it's good to see someone run down the SEC net capital rule argument. Irrespective of the 2012 election, I suspect we're in for a strong dose of self-serving financial crisis revisionism from financial institutions and anti-regulatory ideologues over the next few years as we hear arguments that there's "too much regulation" of banks.  

(Mind you, I'm often sympathetic to arguments that particular regulations are bad regulations, but the "too much regulation" argument is the surest sign that the proponent has no interest in whether regulation is done well; it is an argument against regulation, period, and that's a position that ideology should trump good government, facts be damned.)  

Here's a simple test of whether there is too much regulation of the banking sector:  what's the demand for banking charters?  I am unaware of any banks deciding to throw in the towel and surrender their charters, and I'm also unaware of any lack of demand for a banking charter.  The question isn't whether financial institutions can operate profitably--it's a question of how profitably.

From a public policy perspective, the specific level of profitability is irrelevant, as long as there is enough profit potential there for private risk capital to step up and provide financial services to society. The continued presence of private risk capital is a shibboleth of "overregulation." It's pretty clear that we haven't hit "peak banking" yet. 

I've found this to be a very hard conversation to have with people in the financial services industry, as many have a hardwired mindset that there is an entitlement to a particular level of profits (and that level can only increase). I guess this is the "endowment effect" in a corporate setting. But it's so fundamentally part of the worldview, that any action that might as an incidental effect reduce (as opposed to eliminate) profits is viewed as beyond the Pale of civilized activity.