Tuesday, January 7, 2014

How regulators view the world

I recently read former FDIC head Sheila Blair's book, Bull by the Horns, about the financial crisis. In the book Ms. Blair frequently refers to herself as a capitalist and someone who believes in free markets. She also never misses an opportunity to laud regulators and the important work they do.

I can understand how bureaucrats like Ms. Blair can see themselves as both champions of the market and as necessary for its proper functioning. She is a Washington insider and associates with other bureaucrats who think the same way. They know little else..

Throughout the book Ms. Blair takes shots at the CEO's and business leaders who "caused" the crisis. She blamed their "short termism" (her phrase); putting short term profits before long term gains and financial stability. She never once acknowledged the role government policy played in the crisis. In fact, she casually dismisses any accusation that the government had anything to do with the crisis.

I find it very interesting that she never tries to understand the incentives that poor government policy gave bankers and financial firms. She ignores a basic economic truth that people respond to incentives and instead characterizes bankers as simply greedy and stupid. It is sad that the head of a major federal agency like the FDIC never put any effort into really understanding and then explaining what went wrong.

A good economist doesn't look at an industry or company and make any remarks about why things are done the way they are done before understanding exactly why they are done that way in the first place. A good regulator (if there is such a thing) should do the same. Why were bankers being myopic? Simply saying their are greedy and stupid is not an answer. It is lazy and irresponsible.

This book confirmed what I thought all along about regulators; they overvalue themselves and the role that they play in the economy and often do not take the time to really understand the industry they regulate. They are simple creatures who seem to think that good regulations can prevent all of our problems, never stopping to think hard about the incentives their regulations create and the secondary consequences that result from them.

Ms. Blair may think the is a free market capitalist, but her actions speak louder than her words.

No comments:

Post a Comment