Did Too Much Banking Regulation Cause the Banking Crisis?»

That’s what some conservatives have begun to argue. They point at the Community Reinvestment Act, the landmark law requiring banks to serve low-income communities. But this is a silly idea. The law has been around for 30 years, but the crisis emerged in just the last few. In this period, activity under the law has been limited, and the Bush Administration has actually made the law weaker. What’s more, the biggest drivers of the subprime crisis are independent mortgage lenders that aren’t covered by the law at all. The cause of this crisis isn’t too much regulation; it’s too little. CAP fellow Robert Gordon explains more here.

Paulson’s Smoke and Mirrors Reform»

In a much-anticipated speech yesterday, Treasury Secretary Henry Paulson laid out his “blueprint” to better regulate the financial sector. Unfortunately, Paulson’s plan is nothing groundbreaking; it’s just another example of the Bush Administration’s smoke and mirrors method of reform.

Although some of Paulson’s proposals do demand more regulation of the financial structure, oversight of the most crucial areas is actually looser and more deregulatory than today’s status quo. Stock markets, for example, would be given increased ability to approve new, complicated financial products without first seeking government approval. It is these intricate transactions that are at the heart of today’s mortgage and financial crisis—and are essentially what caused the demise of investment banking giant Bear Stearns.

The Consumer Federation of America hit the nail on the head when it compared Paulson’s “response” to the mortgage and credit crises plaguing Americans to a past Administration disaster — Hurricane Katrina:

“Rolling out this plan in the middle of the current crisis is like telling Hurricane Katrina victims stranded on their rooftops in New Orleans, ‘Don’t worry, if you can hold for a few years, we’ve got a really great plan to restructure the federal emergency response system,’ ” said a statement issued by the CFA.

“This plan,” the group said, “had its genesis in Secretary Paulson’s conviction that overregulation and inefficient regulation were hurting the global competitiveness of U.S. markets. In fact, experience has repeatedly shown that regulatory failure, not overregulation, is the greatest threat to the health of our markets.”

Paul Krugman, in an op-ed, shared a similar sentiment:

And sure enough, according to the executive summary of the new administration plan, regulation will be limited to institutions that receive explicit federal guarantees — that is, institutions that are already regulated, and have not been the source of today’s problems. As for the rest, it blithely declares that “market discipline is the most effective tool to limit systemic risk.” The administration, then, has learned nothing from the current crisis. Yet it needs, as a political matter, to pretend to be doing something.

The Bush Administration has a clear record of reform over the past seven years — reforms that cater to big business, Wall Street, and the rich while masquerading those policies as helping middle class Americans.

While Bush Administration Begins To Grasp Failures Of Deregulation, McCain Wants More Of The Same»

In a speech this morning at the U.S. Chamber of Commerce, Treasury Secretary Henry Paulson forced conservatives everywhere to take a long, hard look in the mirror.

As Paulson laid out his prognosis for America’s mortgage crisis and last week’s disaster on Wall Street, he tossed aside the dogmatic, decades-long conservative tradition of promoting market deregulation:

”This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions,” Paulson said. ”These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability,” he added.

While some conservatives grasp the failures of deregulation, John McCain wants more of it. In McCain’s major housing crisis speech last Tuesday, he continued to highlight an inadequate plan to resolve the problems on Wall Street by making this assertion:

“Our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital.”

Perhaps McCain’s archaic logic comes from his advisers (as we all know that McCain is no expert on the economy). Paul Krugman rightly notes that “his chief economic adviser is former Senator Phil Gramm, a fervent advocate of financial deregulation.” “I’d argue that aside from Alan Greenspan, nobody did as much as Mr. Gramm to make this crisis possible,” Krugman writes.