Behind the Lines: Banks like cartels?

Welcome to Behind the Lines, a weekly conversation with Salt Lake Tribune cartoonist Pat Bagley and BYU economist Val Lambson.Lambson: An enlightening analogy. Let's try some others. For example: Government regulation causes bank screw-ups in the same way that city planning commissions cause homelessness. Or this: Government regulation causes bank screw-ups in the same way that the War on Drugs causes drug cartels to resort to violence. Or perhaps this: Government regulation causes bank screw-ups in the same way that the War on Poverty engenders hopelessness in the inner cities. Traffic laws may indeed make it more likely that a given drunk driver will have more accidents while recklessly trying to escape arrest, but these laws probably reduce the number of drunk drivers enough so that the overall number of accidents falls. Not all regulations are likely to have similar positive consequences.Bagley: Before getting to the regulation of Wall Street, I concede your point: Government sometimes screws up. But it also sometimes gets it right. A lot more is known about urban planning than in the '60s, when government block housing institutionalized dysfunction in the inner city. By way of contrast (and 40 years) here is a current story in the Tribune by Brooke Adams about a program to get the chronically homeless off the streets that is both a) working, and b) saving the taxpayers money. Here is the gist of it:Since 2005, when the state launched its Housing First initiative targeting people who are chronically homeless with programs offering permanent housing and support services, the number of chronically homeless people has fallen by 72 percent. "It is less expensive for society to house these individuals than it is to have them on the street," Gordon Walker [the director of Housing First] said.Mr. Walker explained the program to me. I was impressed that practicality and humanity weren't necessarily at odds. You can do good for the "least among us" (i.e. indigent and mentally ill) while doing well (for the taxpayers).Speaking of mental illness, did you read this article that one-out-of-10 Wall Street employees may be a psychopath?You bet I want clear and enforceable regulation of Wall Street.Lambson: I wonder how this compares to the percentage of psychopaths among, say, editorial cartoonists. In any case, I concede that government sometimes gets it right. With government doing as much as it does, it is bound to generate lots of anecdotes on both sides. But regulation has systematic dangers: For example, potential capture of the regulators by the regulated. This tendency has been long recognized by economists and political scientists, including a close relation of yours. Government doesn't systematically and dispassionately apply the best available reasoning in forming policy. The political process is far messier, which suggests to me that it should be invoked much less than it is.Bagley: Okay, here we get to the point of the cartoon. Unbridled Wall Street "exuberance" (i.e. greed) crashed the economy in 2008. I totally, completely, thoroughly, absolutely, and comprehensively reject the argument that government interference forced the banks to take on too much risk, leading to the crash. Banking lobbyists asked for, and got, deregulation in 1999. The Bush administration instructed federal watchdogs to refer to financial institutions as "clients" and "customers," while at the same time starving regulatory agencies of funding. The fact that not one banking heavyweight has been indicted is proof that the system has been corrupted, when, at this point in the 1980s Savings and Loan debacle, almost a thousand indictments and convictions had been obtained.Lambson: Some, like you, argue that the crisis of 2008 was caused by a relaxation of regulatory oversight that allowed massive fraud and skullduggery. Others, like me, assert that pressure by politicians and regulators to lend money to people who were unlikely to repay was the underlying problem. So which is it? Probably a combination. But fraud is already against the law, even without additional regulation. Perhaps the lack of indictments and convictions is significant, but not in the way that you are arguing.Bagley: There is no question in my mind who is responsible. Last month Wall Street's "cleanest" banker was on Fox News crowing about how his bank, JPMorgan, didn't need government regulation because it wasn't making risky bets. Three billion-in-losses-and-counting later, Jamie Dimon suddenly doesn't look like the smartest guy in the room.The Top Comment on last week's conversation with Sister Dottie S. Dixon is from poster47: I always did wonder how to spell crimanentlee.