While pondering the wisdom of those who can prevent the next financial crisis…
…check out the wisdom of politicians and regulators evidenced before the last crisis.
Read The Housing Bubble and the Limits of Human Knowledge , by Alex Pollock.
The fallacy in play today is that the regulators who didn’t see our current financial crisis coming (or helped facilitate it) are now wise & bright enough that they will be able to detect any future crisis far enough in advance to prevent them. It’s quite obvious that is the operating concept driving laws and regulations for several years now.
John Cochrane makes this point in his article Limited clairvoyance:
The current approach to financial and banking regulation relies a lot on the idea that our now-wise regulators, armed with new powers and the tens of thousands of pages of Dodd-Frank regulations, really will see trouble around the corner next time and do something about it. If only they had more power back then….
He then points to the article by Mr. Pollock I linked above.
Here are two of the 10 quotes that caught my eye:
3. “The facts are that Fannie and Freddie are in sound situations.” — Christopher Dodd, senior Democratic senator, prominent Fannie supporter, chairman of the Senate Banking Committee
Pronounced two months before Fannie and Freddie collapsed.
7. “More than 99 percent of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.” — Federal Deposit Insurance Corporation
This statement was made in the second quarter of 2006, at the peak of the housing bubble. More than 400 such institutions later failed and others were bailed out in the ensuing bust. The FDIC failed its own required capital ratio, reporting negative net worth.