More regulation isn't the only answer

David Frum


Kai Ryssdal: Christopher Dodd said today it may be early next year before the Senate gets around to figuring out new rules for the financial industry. The chairman of the Senate Banking Committee told CNBC this morning in almost as many words that you just don't want to go to fast on these sorts of things.

Commentator David Frum says we're going to need more than new rules, whenever we get around to them, to prevent the next crisis.

DAVID FRUM: Are we in danger of learning the wrong lessons from the banking crisis? President Obama is pushing for tighter regulation of U.S. banking -- maybe to look more like Canadian banking, which has largely escaped the current crisis.

But is regulation really the story here?

Like the United States, Canada dropped the barrier between commercial and investment banking. Like the United States, Canada also allowed banks to take more risk: at the peak of the boom, Canadian banks were borrowing 18 times their equity, a ratio that looks cautious only compared to the even more zany ratios that prevailed south of the border.

No, there are two very different lessons to learn from Canada.

First: Canadian banks are stronger than U.S. banks not because they are more regulated, but because they are more diversified. Unlike, American banks, chartered by states and concentrated in certain regions, Canada's big banks are chartered by the federal government and do business on equal terms in every province.

Second: Canada escaped the United State's financial crisis not because of smarter bank regulation, but because of less stupid housing regulation.

The Canadian government did not press Canadian banks to extend zero down-payment mortgages: 20 percent down is the rule. In Canada, a mortgagee who cannot meet the payments does not just hand over the house keys to the bank. He or she hands over his or her checking account, and any other assets as well. Canadian home ownership rates approximate rates in the United States, but because mortgage interest is not tax deductible Canadians pay the full cost of ownership themselves and so tend to buy smaller homes than Americans do, about 1800-square-feet for the average new home, as opposed to the more than 2300-square-foot average in the pre-crash U.S.

A model to follow? Apparently not. We are eager to blame the banks for securitizing bad mortgages, not nearly so eager to put an end to the bad mortgages that started the trouble.

We want to hem banks in, not allow them to grow and diversify. We tell ourselves that we want solutions. But what we really want most is somebody to blame, meaning somebody other than ourselves of course.

RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute.

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Oh, God. I had tuned Marketplace out for months. I had the misfortune of tuning in again to hear this insane piece by David Frum, and I immediately ran for the hills, again.

Let's get one thing straight. The banking system has phenomenal practices in place to assure that it is lending the right amount of money to responsible people. (We all know what a FICO score is, right?) In the ABSENCE OF REGULATION, these practices were abandoned, and banks loaned crazy amounts of money to irresponsible people, and then they bet the whole kit and kaboodle on the resulting securities that they stupidly based on loans that they knew were no good.

And, somehow that's the little guy's fault?

Twenty years ago, banks emphatically rejected unqualified borrowers. The last 10 years, they happily approved the same lousy borrowers. How is this the borrowers' fault?

Yes, this is an opinion piece, but opinion pieces so far removed from reality counteract Marketplace's journalistic mission.

I might tune in next year to see if Marketplace's marked decline has begun to reverse or not.

I'm not optimistic.

Mr. Frum is not entirely correct about Canadians requiring to have 20% down to qualify for a mortgage. Using the Canadian Mortgage and Housing Coporation ( CMHC ), Canadians only need to put down 5% down. The CMHC provides a mortgage insurance. Approximately 1 in 3 houses in Canada are purchased using this service. That 5% down amounts to more-or-less the insurance premiums which are fees rather than equity being put into the mortgage, so purchases on speculation or flipping a home is minimized.

He makes some valid points. But if we really want to find the source, let's look at Congress. Four decades of deficit spending means we have tried, and failed, to borrow our way to prosperity. This is not rocket science, guys.

Come on guys! can't you do any better than the warmed over shill from AEI?!

You can do better as to content and commentary.

David From seems to be living in an alternate universe. There are people to blame, but are they willingly taking responsibility, are they turning themselves in? There are definite places where regulations that had protected our economy since the 1930's were changed. The Glass Stegall act was changed in 1999, and in 2005 the OCC lowered the amount banks need to have on hand from 60-30%. It is obvious that you are on the side of the ARROGANT THIEVES, who think if they risk other people's money and loose it, it just too bad! The American consumer should take all the responsibility and bail out the economic idiots when they fail. Who cares if people loose their JOBS, their PENSIONS, their HOMES, their money for COLLEGE? Your with the whiners on CNBC that are crying because the CONSUMER IS SAVING, instead of spending, what no bonuses this year WHAAAA! Here's the bottom line, that's how you Conservative Business people like it, nice and simple, NO REGULATIONS, NO MORE OF MY MONEY TO INVEST!!! Spend a few more years there at the Enterprise Institute, live in your alternate reality. Arrogance always results in disaster, remember the TITANIC.


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I would just comment that Mr. Frum seems to be unable to identify "regulation" that comes from within, as opposed from without and those that tend to exercise common sense humane moral values, self-control, honesty and integrity offer less or no reason for external regulation. In addition, lending laws also caveated that all lending should be performed as part of safe and prudent business practices. The idea that banks were forced to bankrupt themselves is a weak one. No place is perfect, but there are some lessons we could learn from places like Canada.

In his commentary today, Mr. Frum admonishes us (we the little people) not to take the wrong lesson from the near collapse of the financial system that graced the end of the Bush administration, as if to prove, that given more time, that administration could do more and better to wreck devastation upon this country. The wrong lesson, he fears we might take is the notion that the financial system should be better regulated to avoid such a collapse in the future. Why might we take such a lesson? It might be because under the Reagan administration�s deregulations the savings and loans collapsed; or it may be that under the Hoover administration the country fell into the great depression. It may be because the vast majority of economic policy experts who are not committed ideologues are saying just this. Or it may be that in the run up to the current collapse, Wall Street investment bankers made millions, tens of millions, even hundreds of millions of dollars making bets and counter bets in the form of derivatives. It may seem to many of us that the invisible hand was really not conceived to thwart greed, but only to provide incentive to productive activity. But, according to Frum, the feeling that there is a relation between such financial catastrophes and deregulation is the wrong lesson to draw from all this. So what is the correct lesson? It is this: American�s who wanted to buy a house (instead of paying outrageous rents) or who wanted to purchase more square footage than they could afford, were wild with greed. It was their recklessness and government�s complicity in, for example providing tax deductions on mortgage loans that lead to this problem. That�s right. It was the average person, working at a job with stagnant wages, in fear of bankruptcy, the member of the 90% who share 5% of the nation�s wealth, who was the container of such avarice. It was not anyone in the elite club which owns the remaining 95% and makes his or her money off of credit default swaps and equity in health insurance corporations. No, it was not them, and to think so, would be to take the wrong lesson away from this financial disaster. Now, this does not make any sense until you realize why Mr. Frum says this is the wrong lesson, which is not that it is factually or objectively incorrect. Rather, it is the wrong lesson because it is the lesson that Mr. Frum and the top 5% he is committed to defending don�t want us to take, lest we wake up and start acting in our interests.

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