This highly successful man gave a speech for the Ayn Rand Center for Individual Rights last week, entitled, The Financial Crisis: Causes and Possible Cures. Adam and I attended. (Thanks J and A, for babysitting!)
The theme of the talk was that the fundamental cause of the crisis is government intervention. Mr. Allison stated his theme, and then gave the audience over an hour's worth of facts to back it up. Amongst many other things, he covered the roles of:
- The Federal Reserve
- FDIC Insurance
- Fannie and Freddie
- Government housing policy
- The SEC-sanctioned ratings agencies: S&P, Moody, and Fitch
- Fair Value Accounting
- The Patriot Act
There were many details that I was unaware of, but most of the general points were familiar to me - the manipulation of interest rates, the insane "affordable housing" policy which is now known as subprime, the pick-a-payment loans made possible by Fannie and Freddie, etc. Still, to have all of those facts put together in one presentation, given by an expert in the field, was quite stunning. It was a wonderful antidote to what is being said in the mainstream media.
Mr. Allison believes that the long-term cure for our current financial woes is a philosophical one. Without a change in the culture of this country, he said, we are clearly headed for disaster - it is just a matter of how long it will take. In the short-term, though, he suggested a 10% real estate tax credit. I couldn't follow the details (sorry, I know this might be the most interesting part to many of you) but the intention was to stimulate activity in the real estate market. More broadly, he called for deregulation of the financial industry, claiming that the idea that deregulation is the cause of our problems is ridiculous since his industry is the most highly regulated one of all time. (I'm not sure he meant that literally, but of course he is correct that it is highly regulated.)
That is what gets me about this whole mess. The evasion required to call for more regulation in this situation is frightening. I can understand ignorance, but it's not coming from the uneducated - it's coming from people who should know better.
It was nice to hear from somebody who really does know better.
Having attended this event, I observe that this is an excellent summary. A couple detail points to add along the same general points.
ReplyDeleteDifferent government agencies are working at cross purposes in the bank bailout. While the Treasury, Fed, Congress, and the White House attempt to press the accelerator, the FDIC is hampering lending, including interference in existing commercial lending, with its encumbering defensive oversight effort to not allow yet another bank failure on their watch.
When these agencies work together it can be worse, as even a financially fit bank could not afford to arose the anger of their FDIC regulators by refusing Paulson’s order to take TARP money.
The mark-to-market rule in Sarbanes-Oxley is preventing the purchase of devalued assets because the purchasing entity would risk an immediate write-down in current conditions even though the value of the asset in the long run is much higher than the current purchase price.
Thanks, Jim. I have very little interest in economics, accounting, or anything of that sort (even though I used to work in accounting and I'm an ace at math). The mark-to-market rule is part of Fair Value Accounting, as I understand it, but I didn't realize that all of that was part of SOX. I'm going to have to go look that up.
ReplyDeleteHi Amy,
ReplyDeleteCould you (or Jim) expand a bit on what Allison said was the contribution of the Patriot Act? That one is new to me.
Thanks.
Beth
He wasn't very specific - just gave the amount that was spent by financial institutions to comply with the new rules (I didn't write down the number), and said that zero terrorists have been apprehended as a result of the new rules. He didn't cover what the new rules are (I think he thought it was common knowledge). I think that there are stricter laws about what financial institutions must disclose to the gov't, but maybe there is more. I'm sure you could google "Patriot Act financial laws" or something and find out.
ReplyDeleteAllison also mentioned that the rules that are supposed to be used to stop terrorists are being used to stop drug dealers and tax evaders. Disgusting!
That was fast. Thanks.
ReplyDeleteBeth, here is a somewhat humorous example I just came across.
ReplyDelete[...] talk by John Allison that I wrote about a few weeks ago is now online at the Ayn Rand Center for Individual Rights. I know quite a few of [...]
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