Do we need regulations like the Glass Steagall act and the regulation that replaced it? How does it help or harm the situation.
Many people think the recent financial crisis, and many previous crises, were caused by insufficient regulation. Others think it was caused by excessive regulation. The ABCT is one such theory. It holds that the regulation of money supply and interest rates by monetary authorities causes misallocation of resources (see Woods - Meltdown and The House that Unce Sam built - Boettke and Horwitz). Other notable books, which I haven't read yet, are Sowell - The Housing Boom and Bust and Norberg - Financial Fiasco, which point to different regulations as being at fault and different causal processes.
I'm inclined to agree with the Austrian explanation. But, assuming the monetary authorities cause crises, or at least caused this crisis, would more stringent regulations on the rest of banking or lending exacerbate or mitigate the crisis? I really don't know. I'd be interested to know others' opinions.
For example, if laws prevented ninja mortgages, or very high loan to value ratios, or very high loan to income ratios, then there would hardly have been a subprime crisis. I remember listening to a lecture by Doug French where is describing some ridiculous practices, and rightly ascribing them to monetary intervention. Nevertheless, I thought surely stringent mortgage regulations would prevent most of these occurrences. Perhaps this would simply divert money to other industries, but it seems to me, in spite of Carilli and Dempster's Prisoner's Dilemma Argument (Review of Austrian Economics 2001), there might not be such misallocation amongst entrepreneurs as amongst ninjas (who we can probably assume lack less financial acumen, intelligent and foresight). And I suspect similar issues apply in banking regulations. If derivatives were heavily regulated I don't think banks would have been able to make such huge losses. So for these reasons I can see how some regulations could help. I don't think they would prevent the business cycle, but perhaps just preventing serious financial crisis.
Also, if we take the view that there were risks in mortgage lending and derivatives which could be prevented by regulation, as an issue separate from monetary policy and the business cycle, then it seems these crises (and then perhaps business cycles too?) could be caused simply by this risky behaviour, even under free banking (it is of course important not to underestimate the importance of moral hazard and the Greenspan put, but banks have failed even without any assurance from government). So then such regulations may be considered even more necessary.
Austro-Devil:For example, if laws prevented ninja mortgages, or very high loan to value ratios, or very high loan to income ratios, then there would hardly have been a subprime crisis.
Austro-Devil:then it seems these crises (and then perhaps business cycles too?) could be caused simply by this risky behaviour
Austro-Devil:banks have failed even without any assurance from government
Fiat money, just like taxation, lets entities (banks, governments, etc) play with other people's capital and thus avoids he most powerful incentive known to man: "Don't lose your stuff!".
I say, kill fiat money, and let everyone (every entity) play whatever games they want with their own capital. The right lessons will be learned pretty quickly, and the one's who don't learn them won't survive long enough to practice the idiotic stuff (in need of regulation). There would be no entity too big to fail, as my deposits and assets would be disentangled from them -- even better, every failure would be greeted by the remaining unaffected as an opportunity to scoop up assets on the cheap.
In conclusion: no fiat money (100% reserves) + absolutely no regulation = best solution.
Z.
I feel that in very simple terms that those who advocate for heavy regulation in the mortgage industry are right in that another bubble can be prevented by restraining the banks in a straitjacket of red tape. The direct results would be no more bubbles in exchange for a rigid, unresponsive, inefficient banking industry. Big government advocates will then think they have fixed the problem, but they havent. The misallocation of resources will now just appear elsewhere in the economy. Then they will point at how they fixed the banking industry with regulation and perscribe the same for whatever new bubble emerges. The logical conclusion will be an entire economy in a straightjacket. Does that sound about right?
I'm no expert in the realm of regulations, but it seems to me that regulations only address symptoms, not underlying problems.
I heard an interview by Ron Paul the other day in which he said he voted against the bill the repealed Glass Steagall. He didn't have a problem with commercial banks becoming investment banks (preventing this is an arbitrary restriction), but he did have a problem with investment banks coming under FDIC protection (which I guess is what happened). When you're under FDIC protection, or you have some other implicit or explicit bailout guarantee, you have no incentive to be cautious and prudent with other people's money.
http://www.house.gov/paul/congrec/congrec99/cr110899-glb.htm
Ron Paul's statement on glass steagall repeal.
Basically, it's a dumb patchwork thing to try to fix other dumb government regulation, like FDIC insurance. Better is just to repeal it all. The banks will always write the regulation, and they will always know the game better than the regulators.
Origins of Glass Steagall: http://mises.org/journals/qjae/pdf/qjae1_1_1.pdf
I believe it was Mises who said that the failures of interventionism lead government to create new interventions to address the failures of previous ones.