Some ramifications of AIG and the crash

Federalism: It’s not just the federal government buying an insurance company. It’s the federal government probably re-writing, or at least messing up, an existing contract. It’s the federal government owning a company in what has been until now, a state-regulated industry. Could this be part of Paulson’s plan to federalize insurance regulation?

Politics. McCain lost more ground in the Iowa market today than Morgan Stanley did in the stock market. Basically, because of what happened today, he’s probably toast. Of course Republicans as well as Democrats deserve some blame.  I fear, though, that this reflects a taste for regulation.  Remember the last time we got a regulatory frenzy after a bust? See below.

SOX. Speaking of the devil. It was supposed to stop excessive risk. But as I have predicted since it was enacted, SOX accomplished nothing other than creating a false sense of security. Will we remember any of the lessons of SOX?  No, of course not.

Corporate governance. While people were obsessing over venality, we learned that the big problem was stupidity.  Hey guys, let's bet the company that the real estate market will always keep going up. There’s obviously been a failure of corporate governance here. On that Carl Icahn and I agree. Of course that doesn't mean that I think the government is smart enough to clean this up.  See above.  The lesson nobody seems to learn is that, while markets make mistakes, they're flexible and self-adjusting.  Government keeps making the same mistakes over and over.

Comments

[save_the_rustbelt]

This is the second bubble in 10 years driven by stupidity and fraud on Wall Street.

I'm not a big fan of increased regulation, or the "more effective regulation" school of thought, but someone needs a plan to improve the trust factor between Main Street and Wall Street.

Ideas?

[Matt Bodie]

Larry -- You say that: "The lesson nobody seems to learn is that, while markets make mistakes, they're flexible and self-adjusting. Government keeps making the same mistakes over and over." But isn't this crisis a lesson to the contrary? We have market bubbles and crashes over and over again. But we haven't have another Great Depression. Haven't many of the New Deal regulatory schemes staved off what could have been a potentially far worse result? I don't hear anyone saying we shouldn't have the FDIC right now.

[Ciaran]

Wow. I thought we'd at least have a few weeks grace period before people got back to calling markets self-adjusting.

[Mel Dubnick]

The very premise that there is distinction between markets and government action is called into question by latest events. Pretty superficial to see them as alternative mechanisms -- they are and have been intertwined for quite a while, and the failures (and successes) of one are those of the other. Today's markets are "flexible and self-adjusting" only when understood within its relations with government -- and the vice versa, for that matter. More than ever need to return to perspective of political economy and surrender those false dichotomies that foster partisan rhetoric more than analysis.