The American Spectator

The Public Policy

Demonizing Deregulation

By Joseph Lawler on 10.9.08 @ 12:07AM

(Page 2 of 2)

One such proposal failed to make it into the provisions of the bailout bill, but could pass in a separate bill or, in one form or another, under the next presidential administration: allowing bankruptcy courts to restructure the terms of home mortgages. According to Ted Frank, such a practice would create "tremendous litigation expenses, since adverse parties would have to battle for the judge's favor over how to value the underlying real estate asset."

More generally, Frank is fearful of overzealous prosecution by regulators. He gave as an example the Bear Stearns executives who merely "incorrectly rejected pessimistic speculation about the future of funds that ended up crashing," but now face allegations of fraud.

He predicted, "Down the road, we can expect to see other scapegoats." Spitzerism, anyone?

Professor Johnsen sees widespread problems with some of the proposed regulations on lending and borrowing. He noted that the art of "financial engineering" is advanced enough to circumvent the most complicated set of rules. "One can prohibit borrowing, but a good MBA student can figure out how to arrange puts and calls to create the same payout structure as borrowing. If done carefully, the firm is able to borrow without looking like it is borrowing." The government has better things to do than playing these games with Ivy League grads.

Scapegoating deregulation might be politically expedient, but winning the election isn't as important as the future of the economy. Increasing government oversight of financial markets and imposing stringent capital requirements will result in more deadweight offices like the OFHEO, and financial instruments even more complicated than the ones at the heart of the current crisis. In this climate, any sensible regulatory policy is likely to get thrown under the bus.

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John McCain, Nancy Pelosi, Economics, Books, Law