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I just had a chance to join a blogger conference call with Rep. Paul Ryan (R-Wis), one of the few members of Congress who actually understands economics, and we discussed the tumult on Wall Street and its implications on government regulation.

Specifically, I asked Ryan to follow up on his statement to the Washington Post that "My instincts and gut tell me [the Federal Reserve Board] made the wrong move" in bailing out AIG.

Ryan, the senior Republican on the House Budget Committee, qualified his comments by saying that he didn't have access to all of the information that they did, and understands that they came to the conclusion that AIG's fall could have a ripple effect on credit markets throughout the world. But he explained why he is instinctively opposed to these actions.

"We are sowing the seeds of a massive moral hazard with these moves," Ryan said. "Not only are we monetizing these problems, which is inflationary, what we're doing is we're telling the markets: 'You better become too big to fail, and we'll bail you out. So load up, grow bigger, take on more risk, because if you're not too big to fail, like Lehman Brothers, then you'll go down...' So I worry that we are creating a real moral hazard that is going to have to be unraveled."

He added -- rightly, in my view -- that the Fed should take a lot of blame for causing the crisis in the first place.

"They kept interest rates too low for too long during the Greenspan period," he said. "It was a period of easy money, and easy money created this credit bubble. You put bad loans in it, and the derivative system, these credit default swaps, went beyond rationality."

I also asked Ryan, given the heated rhetoric on both sides about taking on Wall Street, how we could avert an overreaction like what happened with Sarbanes-Oxley (passed in the wake of the 2002 accounting scandals that rocked Wall Street) in which regulation created more problems than it solved.

"On the regulatory front, we need to just relax, and see this through this crisis moment…" he said. "What we need is not a pile of new regulations, because what we'll do is just push firms overseas and just make America less of a financial powerhouse. We need smart regulations, moderate regulations that fit the 21st century, centered on the notion of transparency. Capitalism cannot work without good information. So the regulations need to be focused on transparency and having good information between the buyer and the seller for these markets to function."

John McCain should be listening to this guy.

topics:
John McCain, Economics