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
