The Department of Bad News
Dylan Ratigan has one of the better pieces celebrating Lehman Day (which marks the beginning of the bailout season in the Druid calendar). At this point, the country — and in particular, the chattering class — has done a much better job facing up to the failure of the financial system than the failure of the political system. The English Lit majors hawking CDOs deserve some portion of blame for the crisis, but so too do the politicians who decided that their job was to unleash Wall Street rather than fence it in, and the political appointees who convinced themselves that the good times were proof of their unique regulatory genius rather than the long party that always precedes an awful hangover.
The hardest question about our overhaul of the financial regulatory system is also the one that the plans still do not answer: How do you regulate the system if the Chairman of the Federal Reserve — and most everyone else — denies the existence of a problem? That, after all, is what led to the crisis of 2008. Greenspan might have commanded an impoverished regulatory apparatus compared to what Geithner means to create, but he could have done a whole lot more than he did. The problem was he didn't want to. Nor did most anyone else. That's what makes a bubble a bubble: People believe in it. And in the current set-up, Wall Street pays the political system to believe harder.
There's no cabinet-level agency dedicated to worst-case thinking (calling Secretary Roubini?), no Department of Buzz-Harshing whirring away somewhere on the periphery of the system. But that's what we need. Because the next economic crisis will look different. Overconfidence hasn't been banished from the financial system, much less the human psyche. Nor is there a regulatory measure capable of protecting against fads and convenient rationalizations. The result is we're giving regulators the power to stop bubbles, but not changing the necessary preconditions for bubbles. And granted, that's difficult to do. But at the least, we could create a louder alarm system, so it would be even harder for those caught in the excitement of the moment to say they never heard the warnings.
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