THEY'VE LEARNED NOTHING ...

Back in March and July I wrote about how our non-regulatory and non-punitive responses to the 2008 market collapse effectively sets us up for an Extreme Do Over.

In a few words - and using ABC's Extreme Makeover Program as an example - I argued "that rather than demolish the commercial banking and investment infrastructure that got us into this mess - and then rebuilding everything with strong firewalls - the Obama administration has signed off on the old framework."

The point I made in both posts was that we've learned little to nothing from the market meltdown. The same people, the same thinking, and the same institutions that got us into this mess are still dominating our economy. In many respects, these developments create all the trappings for an Extreme Bailout Do Over.

This article from William Black offers additional insight into why we should not be surprised if we go through another 2008 market meltdown.

Black - who is a white-collar criminologist, a former senior financial regulator, and now an Associate Professor of Economics and Law - tells us that the epic regulatory failures at the Federal Reserve are the product of the continued intersection of a failed ideology with bad economics.

Specifically, Black points to five failures that are the stuff of legend:

1. Former Fed Chair Alan Greenspan believed that the Fed should not regulate fraud because the market would clean up fraud on it's own.

2. Current Chair Ben Bernanke also believed that the Fed should rely on self-regulation by “the market.”

3. Former Federal Reserve Bank of New York President Tim Geithner believed that he was never a regulator while he headed the NY Fed (a true statement as it applied to him, but not one he’s supposed to admit).

4. Bernanke gave key support to the Chamber of Commerce’s effort to gimmick bank accounting rules to cover up their massive losses — allowing them to report fictional profits and “earn” tens of billions of dollars in bonuses

5. Bernanke recently appointed anti-regulation crusader Dr. Patrick Parkinson as the Fed’s top supervisor.

Of these five developments, Dr. Parkinson's recent appointment is especially noteworthy because it shows that our regulatory mandarins have learned nothing from the past year.

Specifically, Dr. Parkinson was appointed largely because he shared Dr. Bernanke’s anti-regulatory ideology, a view that he hasn't changed even in the face of the Great Recession. Perhaps more importantly, as Black points out, Parkinson is an economist who has never examined or supervised. This is important because Parkinson is also known for naively claiming that credit default swaps (CDS, a.k.a the financial derivatives that destroyed AIG) should be unregulated because fraud was impossible among sophisticated parties! Huh?

Who believes crap like this? Oh, that's right. The same people who believe "invisible hand" pixie dust creates free markets where people magically become virtuous in the pursuit of profit.

And fairy tale market conditions exist too ... if you just close your eyes, click your heels together, and repeat the words, "There's no place like home ..."

Look, I'm all for creating useful myths and legends that help to build and unify a society (like George Washington never told a lie). But saying fraud is impossible among sophisticated parties in a market setting is like saying mingling among societies' power elites will turn ladies of the night into ladies of virtue. It doesn't happen.
 
At the end of the day, the anti-regulatory policies that Greenspan, Bernanke, Geithner, and now Parkinson champion are simply naive and reckless. Wishful thinking is no substitute for good policy.

- Mark