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Business Spectator Column

This week’s Business Spectator column.  If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list.  Email info at institutional-economics dot com.

posted on 29 March 2008 by skirchner in Economics, Financial Markets

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Stephen, the conventional wisdom at the moment is the U.S. credit crisis was created by lax lending standards, poor regulation of non-bank mortgage lenders, and speculative bubble in the U.S. real estate market.

Now I know you don’t believe in bubbles, and I’m sure you’re against tighter regulation of any sort, so can you please explain to me what you believe the causes were and what measures need to be put in place to fix the problem and prevent it happening in the future?

Posted by .(JavaScript must be enabled to view this email address)  on  04/02  at  02:14 AM


That question does not have a short answer.  You can’t regulate away risk and loss and it would be undesirable to do so even if you could. 

If anything, recent developments illustrate the self-correcting nature of markets.  It was markets and not regulators that first detected these problems.  Regulators are mostly just responding to the signals and corrective actions already being generated by markets.

Posted by skirchner  on  04/02  at  11:14 PM


That didn’t really answer my question about the cause of the current crisis.  Is it not true to say that if there had been tighter regulation of mortgage lending in the U.S. it would have prevented sub-prime loans being made in the first place?  If simple rules about debt-to-income ratios etc had been in place (and enforced) surely this could not have happened?

As I understand it, the sub-prime fiasco resulted from a desperate race to the bottom in terms of credit quality.  Lenders desperate to maintain market share would lend to anyone, and mortgage brokers would “sell” loans on commission and then walk away with no responsibility if the borrower didn’t have (and never had) the capacity to repay.

I don’t know how the market can correct such behaviour.  Sure, the lenders will impose much stricter rules for a while, but 10 years from now everyone will forget and history will repeat.

Posted by .(JavaScript must be enabled to view this email address)  on  04/03  at  09:48 PM


I don’t think you can regulate lenders or borrowers into never making mistakes.  The regulators did not see this coming, so why should we assume they would do a better job of regulating markets than the market itself?

Posted by skirchner  on  04/07  at  12:48 AM


The regulators did not see this coming…

True enough.  No-one (credible) saw it coming except the financial doomsayers who have been banging on about unsustainable levels of debt (and a bubble in the housing market) for 5 or 6 years now.  True, the doomsaysers have predicted 100 out of the last 10 financial disasters, so they don’t make the best forecasters, but you have to admit some of what they’ve been predicting has now eventuated.

Is it not true to say that the move towards credit deregulation (since the 1960s when you had to beg your bank manager for a loan) has made us more susceptible to these kinds of events?

Deregulation has doubtless resulted in a better performing and more efficient market in the good times, but equally, if we had not allowed dergulation to proceed as far as it did, I don’t think we’d be in the position we are now.

Posted by .(JavaScript must be enabled to view this email address)  on  04/07  at  01:43 AM



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