> Zarf BeebleBrix wrote:
>
>Actually, I did mean to touch on this.
>
>Now, personally, I think both sides are oversimplifying the issue.  The economics we're talking about is much more complicated than a
>general "regulations good/bad" debate.  Regulations as a whole have different economic objectives (ranging from prevention of
>externalities to preventing asymmetric information).  Unless you're getting into the nitty gritty details of each industry and the specific
>regulations and economic circumstances surrounding that industry, using any one case as an example of regulations as a whole being
>good or bad is meaningless.

The folly in your argument is that this isn't a "they did it too" issue.  Both sides aren't oversimplifying the issue.  One side is advancing a very simplistic "regulations are bad, deregulate" line.  The other is suggesting that we should figure out what sort of changes to the regulatory structure we can make today that will prevent this sort of disaster from happening in the future.  They're not opposite viewpoints and the direct opposite of the "regulations are bad, deregulate" crowd is basically missing in the American dialogue.  There certainly are people you could find who support any and all regulations but they're few in number and completely lacking in political clout.

>Oh, right, side note: Trying to determine the regulations levels in the US relative to other nations is a terrible comparison anyway due to
>federalism issues.  Federal regulations are overlapped by state-level regulations, which are wide and varied.  A business which would be a
>pain in the ass to develop in, for example, Massachusetts, may be much easier to produce an run without regulation interference in, say, Texas.

Interestingly, Texas never became very involved in the housing bubble and when that bubble crashed it didn't particularly affect Texas (though the economic collapse of its trading partners surely caused plenty of pain).  A lot of analysts attributed this to Texas having some regulatory rules regarding mortgage refinancing that basically made illegal some activities that were common in bubble states like California or Florida.  Texas is hardly a good example of how to avoid bubble crashes (what happened there in the '90s was the worst mess between World War 2 and the Great Recession) but here's an obvious example of how state-level regulations can vary.  I'm certain that a lot of Texan real estate agents weren't too happy that they couldn't take advantage of the same gimmicks that were making their peers a lot of money in other states.

>As an example of my overall point, let's talk about the financial crisis.  I can actually point to two very good examples of regulations
>which contributed to the financial crisis... scenarios in which, if the industry was left to its own devices, would have been avoided.

>1: The Community Reinvestment Act (thanks, dpenguins)
>
>The bill was simple, and had what would be considered a good intent.  The bill required that local banks approve a certain number of
>home loans in the place where the bank is located.  So if there's a Bank of America in a poor neighborhood, more than likely, the bank's
>data would advise against lending in that particular region, instead using the deposits in that region to lend projects in other, more affluent
>parts of the country.  The result, though?  Banks would be required by law to make home loans from which they are less likely to receive
>a return.  Among home mortgage seekers, these are probably the most likely candidates for defaults.

Now that's an absolutely fabulous bit of logic, but do the facts support your inputs or your conclusion?  Let's talk about the Community Reinvestment Act and what role it played in causing the financial crisis.  I took a drive recently to visit some friends in Sacramento and then San Francisco (I live up in northern California).  As I drove through the suburbs of Sacramento I could see entire neighborhoods full of foreclosed homes and underwater mortgages from the freeway.  Brand new homes in nice suburban neighborhoods, built and bought with the easy money available during the mid-2000s.  As I drove through many of the poor inner-city neighborhoods of Oakland I didn't see anything like that.  Sure, foreclosures and defaults here or there but nothing that you wouldn't have expected in 2005 or 2015.

Here's the thing.  Loans that were made for reasons related to the Community Reinvestment Act didn't perform that badly.  Those nice people purchasing $300,000 homes in Natomas (a suburb of Sacramento) who couldn't possibly lose their jobs or in any way, shape, or form end up defaulting on their loans weren't the beneficiaries who received loans due to CRA regulations.  But the housing market collapse didn't blow up in poor inner-city neighborhoods of Oakland where the CRA had strong effects... it blew up in places like Natomas or Fairfield.  Sure, there were problems in places where the CRA probably played a bit of a role, but that pales into comparison to what happened in a lot of nice, suburban neighborhoods where banks were making loans because they expected good profits.  The housing crisis didn't happen because banks were forced to make low-profit loans that they didn't want to make.  It happened because banks were making what they thought would be high-profit, low-rate loans to what they thought were low-risk customers but when those customers in fact turned out to be high-risk it blew up in their, and our, faces.

Risky loans that you knew were risky with high interest rates weren't the problem.  Those risks were appropriately hedged against.
Risky loans that you thought were safe with low interest rates were the problem.  Those risks blew up in our faces.

>2: Credit Rating Agencies
>
>This is a particularly interesting story.  Federal regulations required that banks that wish to bundle home mortgages in order to sell
>securities on those loans must first present the security package to a credit rating agency.  The rating agency is required to review the
>mortgages within the security, and give the security a credit rating.  The security can't be sold unless it gets a good rating from a credit
>rating agency.  What's the result?  There's only about 5 federally recognized credit rating agencies in the country.  These agencies will be
>interacting with the same banks over and over again, rating new securities the bank provides for review.
>
>So what happened in the industry?  Credit Rating Agencies get paid based on the number of ratings given, so they have an interest in
>encouraging more credit ratings coming their way.  The banks, however, only get a return on investment with a good rating.  Thus, it's in
>the interest of the bank to send their securities to the rating agency which is most likely to give a positive rating.  With that in mind, it's
>also in the interests of the credit rating agencies to give more good ratings to encourage more business.
>
>The result?  The credit rating agencies, due to their regulation-sanctioned hold on this industry, were able to give a ton more A-ratings
>than normally, and were encouraged to do so by banker incentives.  The securities other people were buying into, with the supposed A
>rating, were simply junk securities given a false positive because regulation established a false credibility in the credit rating agencies.

This is an argument for stronger regulations and that the regulations we had in place prior to the meltdown were completely inadequate.  I don't see how you could possibly use this interesting story in any other way.  It makes the case for having regulators that aren't paid for each gold-stamp they give to the entities they're regulating.  In the absence of the credit rating agencies, what exactly do you think would happen?  The banks wouldn't have been regulated in that sense at all or they possibly would have set up an industry-designed private regulatory structure that was just as corrupt and ineffective if they felt that it would improve their credibility.

The credit rating agencies clearly need reformation and they were a major causal factor in the economic crash that occurred over the past few years, but I don't see how "less regulation" resolves any of the problems that you note.  If anything it would worsen the problems.

>Do either of these mean, necessarily, that regulations as a whole are bad?  No.  But they do mean that when regulations are created, it's
>easy to forget about the unintended consequences of regulation.  Especially in example #2, regulations shift the incentives for businesses
>and consumers to something they wouldn't otherwise do.  Unless you look at the full spectrum of incentives and possible business actions,
>the regulations created can easily screw up incentives, creating problems such as those mentioned above.

The first really isn't relevant and is a gigantic red herring.  The second doesn't really suggest that regulations are bad at all.  It suggests that a specific regulatory structure was completely inadequate and institutionally corrupt.  But when you talk about the regulators having an effect to "shift the incentives for [investors] to something they wouldn't otherwise do", you make a large and substantial mistake.  In the absence of that pathetic regulatory mechanism, investors would still be seeking profitable returns and would still have been lending money to banks.  It wasn't the gold-stamp of a rating agency that was drawing customers to them; it was the widespread belief that lending institutions could provide good, safe returns for their depositors.  The rating agencies helped to foster that image and to encourage the bad practices that abounded, but in the absence of an inadequate government regulation scheme the banking institutions would have easily set up an analogue of their own with even fewer teeth if they'd felt that it would improve their credibility.

You end on a good point though.

>It doesn't even necessarily mean the solution to any particular situation is an increase or decrease in regulation, but by tinkering and
>reforming the way regulations shape in that particular industry.

But as I brought up at the top, you have two factions on this issue.  One that essentially agrees with your thrust here and another (epitomized by guys like Einstein) who are adamant in their view that all regulations are terrible things.  There's not a significant faction that is a direct opposite of Einstein's ideologism.  The debate is primarily composed of right-ideologues like Einstein and people who are trying to figure out a good balance.  There's really nobody on the other side of the scale.