Alternatively, says Ip, Greenspan could have taken the regulatory approach: requiring 20% downpayments or mortgage insurance for all mortgages, for instance, or requiring stricter underwriting at the originator level. But of course, these moves, as Ip says, would never have been implemented by Greenspan, the great deregulator. [...] But I certainly agree that if the US had followed the lead of pretty much every other country in the world and simply regulated its lenders, a lot of the worst excesses of the bubble could have been avoided. I don’t know where major regulatory overhaul stands on the Obama administration’s list of priorities, but I do hope that by the end of this administration, we will no longer be in a position where lenders can lend out billions of dollars to homeowners with essentially no regulatory oversight whatsoever.
I think there’s a bit of a contradiction between the two highlighted sentences and it speaks to the core paradox underlying a lot of the discussion over financial regulatory reform, namely that it seems that regulators largely already had enough authority to avoid this problem. Looking back with 20/20 hindsight the issue isn’t so much that we needed better “rules” as it is that we needed regulators we took seriously the idea that cracking down on private sector funny business is their job. Instead, we seem to have mostly had regulators who regarded the laws on the books as an unfortunate and anachronistic departure from a pure laissez faire ideal. So you got things like the SEC prosecuting celebrities on tenuous charges, but no real oversight of a mortgage sector run amok. When you look back at the trajectory leading up to the crisis, the problem of “deregulation” isn’t so much that there’s some particular rule that was removed during the Greenspan Era that could have saved us as it is that the mindset that drove the legislative agenda of deregulation ultimately proved paralyzing to policymakers. If you decide that, in theory, minimal regulation is desirable because rational self-interest will create a self-policing market then this theory will color your perception of a bubble—specifically, you won’t see the bubble (this is, as they say in the philosophy departments, the interdependence of fact and theory). I’m not really sure what kind of overhaul prevents that problem. What you need are better people—people less in thrall to a heroic Randian vision of capitalism.