IT'S NEVER A BAD THING WHEN BARNEY GETS OFF YOUR BACK:

Barney Frank Backs Off: A sign that previous notions of government regulation might no longer make sense. (Peter J. Wallison, 05.05.09, Forbes)

Among the more significant recent developments in financial market regulation was the announcement by Barney Frank, the chair of the House Financial Services Committee, that he was deferring action on the Obama administration's plan to create a government agency, like the FDIC, to resolve "systemically important" failing financial institutions. His reason was that the idea should be included in a comprehensive bill to deal with financial regulation, but in fact the policy support for the idea is so weak that the proposal should be consigned to a much-deserved oblivion. It's unlikely that Frank's announcement was made for this reason, but one can hope.

The administration's resolution plan assumes that the current crisis was caused by the failure of Lehman Brothers, and that if Lehman Brothers had been resolved by a government agency--the way the FDIC resolves banks--the ensuing chaos in the international capital markets would not have occurred. This view of recent history, however, is faulty.

It is certainly true that after Lehman failed the markets froze, but to say that this was caused by Lehman is true in only a very limited sense. The crisis did not begin when Lehman failed; it began in the summer of 2007 with the markets' sudden realization that the triple-A ratings on asset-backed securities were not accurate. The resulting loss of confidence in ratings was a powerful external shock to the market, causing a collapse in trading of all asset-backed securities.

It was a crisis of information, not regulation.

Posted by Orrin Judd at May 5, 2009 8:26 AM