The Real
Issues: Economics
A Comment on Mohr's Financial Crisis Analysis
By
Charles Kirchofer, October 25th, 2008
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I would like to make simply one brief comment or addition to Mr. Mohr's
analysis of the financial crisis. As I've stated in my article in
defense of the core ideas surrounding subprime lending, incorrect
pricing of risk coupled with the opacity of the securitization system
led to the crisis more so than the subprime
mortgages themselves. Mr. Mohr illustrates this very well in his
article. He advises us to seek the blame more by the SEC and the
Treasury than by the Fed. I would like to add an additional level of
blame: Congress. It is, after all, Congress's job to ensure that the
SEC has the appropriate legal base to regulate the markets. The SEC is
more involved in law enforcement than anything else. Loopholes in the
monitoring of credit default swaps made it essentially impossible for
the SEC to react accordingly. As former SEC chairman Christopher Cox
points out in a Congressional
Oversight hearing*, this is partly due to the fractured
responsibility structure within the Congress itself, which the Congress
is (hopefully successfully) currently attempting to remedy.
The other thing I would like to reiterate is the role of the Fed with
its blunt tool of interest rates. I believe in the future it will be
important for the Fed to more closely monitor asset prices along with
inflation, especially in times when global disinflationary pressures
are keeping inflation low and credit cheap, the perfect conditions for
asset bubbles and debt explosions. It is likely that the Fed has
learned this lesson. For the sake of us all, let's hope I am right.
*Note: I have experienced numerous difficulties with the C-Span website
when attempting to call up this video. I was successful at one point
however, but I'm not sure if the problem is with me or with the C-Span
server itself.
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