In The Wall Street Journal Tuesday, Breaking Views chief Hugo Dixon offers his Olympian views of the current crisis. It's a little hard to discern why he published it right now -- maybe Breaking Views has a lot of vacations on tap -- but it's a piece that could have been written at any time after, say, July of last summer. In fact, it's a diagnosis and a set of prescriptions that one could have made after nearly every financial dislocation of the past few decades. His core contention, that somehow the financial markets lost their balance and tilted away from fear to greed has been chanted so often, over so many years, that it feels like it's taken out a subprime mortgage in the land of the cliché.
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Like all clichés, the notion has considerable truth to it. And Dixon does trot down the mountain a bit to offer more specifics, about liquidity, capital ratios, skewed incentives and the notion that previous bailouts had given folks in the market free rein. Who can argue? Dixon does undermine his bailout argument some when he offers up the notion that Wall Street and banking have too many folks who don't remember financial history, or even realize there is such a thing. Maybe it's that Wall Streeters only remember bailouts and not the crises that provoked them.
But the big question that Dixon does not tackle is whether this crisis is really just like all the others -- Long-Term Capital Management, the tech bust, the S&L crisis -- or whether there is something about it that is fundamentally different, fundamentally more serious. Why should this matter? Because if it's just a matter of making some adjustments, of twiddling the dial back on greed and pushing the fear lever up a bit, of installing tougher capital requirements or leverage ratios, then the system of regulation and oversight we now have is mostly sufficient. I would argue that this is the view from Treasury; and Treasury's sharp nudge of the Federal Reserve onto the stage as a super-regulator, for all its drama, does not suggest that there are fundamental underlying problems that need to be tackled. In fact, the Fed supplanting the Securities and Exchange Commission and some minor regulatory fiefdoms really resembles an attempt to realign supervision to the reality that it is really more about a single uber market and not a gaggle of varied markets or differentiated institutions. In a sense, it's fundamentally conservative. Let's clean it up and let the games begin again.
Now that may be right. If rumors can get amplified these days, so too can fears, particularly from the self-interested. But even on Wall Street these days -- particularly on Wall Street -- there is a murmur that perhaps something more deeply is wrong. The complicity in the crisis is both wide and deep, from mortgage borrowers to giant, global firms. The problem appears to be systemic. And the causative issues -- some outlined by Dixon, not to say a variety of others -- have been with us for some time, though rarely in this virulent a form and rarely so synergistic with each other. At the very least, the regulatory system, with its roots in the New Deal, has been shattered, with little eruptions of debate and controversy over fundamental tenets: transparency, disclosure, mark-to-market, moral hazard, socialization of risk, the role and limits of the market. We can rebuild the institutional structure, but what about the concepts that underlay it? Should they -- will they or given our recent politics, can they -- ever be debated before we trundle into the future? - Robert Teitelman
