You hear it everywhere: Last year's market crash was caused by Wall Street greed and too much deregulation.
President Obama's "60 Minutes" interview last week was a variation on the theme. He referred to Wall Street executives as "fat cat bankers" and said flatly that they "caused the problem."
Yet here's what's curious: Seldom do you hear anyone cite a specific deregulatory step and show how it contributed to the financial panic.
As for greed, well, sure. On Wall Street, greed isn't exactly hard to find. The place wouldn't function without it.
All this ignores the fact that the seeds of the crisis weren't sown by Wall Street. They were sown by government.
Government kept interest rates too low for too long, creating the cheap money that fed the housing bubble. Government pressured Fannie Mae and Freddie Mac to buy up gobs of subprime mortgages, assuring a ready market for the lenders who made these dubious loans.
A government-created oligopoly of rating agencies stamped piles of subprime loans AAA. Wall Street firms levered up to buy truckloads of the stuff, in part because government policy permitted lower capital set-asides for holdings of AAA securities.
Certainly, Wall Street went too far in seeking profit from these opportunities. Its creative geniuses spun out exotic, too-clever-by-half products that rapidly collapsed in value when the bubble popped.
And while we're at it, let's not leave out the unscrupulous lenders and credulous or flatly dishonest borrowers, who bought lavish homes with little or no down, or after lying about their incomes.
Somehow, laying "the problem" on Wall Street greed and deregulation doesn't quite cover the territory. Worse, it doesn't create a political environment conducive to thoughtful ways to reform the system, so it's no surprise that Congress' attempt to retool the regulatory structure isn't going well.
The main innovation lawmakers are debating would create a "systemic risk regulator," which would watch the dials on the financial dashboard and take action before the system veers toward the precipice.
The recently passed House bill piles on more rules, including tougher capital requirements for entities judged "systemically important." Regulators could shut down reckless institutions using money from a $150 billion fund created by assessments on those firms.
But $150 billion isn't much if you're talking about a Bank of America, which has debt about five times that amount.
And the power to determine systemic risk is so broad it will probably trigger constitutional questions if it's ever exercised. The systemic regulator could conscript all sorts of institutions, even mutual funds, into this regulatory regime — and then direct all sorts of remedies, such as downsizing, selling off subsidiaries or canceling share offerings.
In winding down a financial firm, the House says regulators could impose "haircuts," forcing investors to take losses for running undue risks. But haircuts aren't mandated, and bailouts would be permitted if needed for "financial stability." Most likely, bailouts would be the norm.
Essentially, said David John of the Heritage Foundation, the House threw up its hands: "The message to regulators is, 'Do what you please but deal with the problem.' "
In other words, systemic risk is like pornography. Lawmakers may be a bit fuzzy on how to define it, but they expect regulators to know it when they see it.
For all the preaching about "greed" in Washington, Congress doesn't seem close to workable solutions to these problems. Worse, by putting excessive faith in a super-regulator, lawmakers could be making the next crisis worse. ("Don't worry! The heroic systemic regulator will take action before things veer out of control!")
It’s hard to be optimistic that this time Washington will get it right, and set up a regulatory system fully prepared for the next crisis. Eisenhower once said, “Every war will astonish you.” Unfortunately, the same goes for financial panics.