David Brooks on financial regulation

From David Brooks via Greg Mankiw:

Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general. ...

The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.

Some Bubble Meter readers may think that I oppose financial regulation. Quite the opposite, I support it. But, there's a difference between effective regulation and ineffective regulation. I believe some parts of the proposed financial reform bills—such as a Consumer Financial Protection Agency—are an improvement on the current system, but I fear the bill may be mostly ineffective. Democrats are too prone to believing in the ability of government bureaucrats to spot trouble before it occurs. At the same time, some simple and important policies—such as requiring banks to issue contingent convertible bonds, banning teaser rates, and requiring home buyers to make sizable down payments—are missing.

Note: Despite David Brooks' claim, home builders didn't help create the bubble. They simply took advantage of it. By increasing the supply of housing, they were actually acting to suppress the bubble.