Bear crisis prompts call for regulation

Marketplace Staff Mar 20, 2008
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Bear crisis prompts call for regulation

Marketplace Staff Mar 20, 2008
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TEXT OF STORY

KAI RYSSDAL: Hillary Clinton weighed in on the economy today from the campaign trail. She wants a new stimulus plan — $40 billion this time — to help states buy up foreclosed homes and restructure mortgages.

Democratic Congressman Barney Frank was talking about Bear Stearns. The chairman of the House Financial Services Committee had an interesting idea: He wants the government — perhaps Mr. Bernanke and the Federal Reserve — to keep an eye on the risks banks are taking, and perhaps intervene in the markets.

From Washington, Jeremy Hobson explores the economics of regulating risk.


Jeremy Hobson: Congressman Frank knew he had an uphill climb when tried to convince bank reps in Boston this morning that the system needs more regulation. So he brought up his old adversary, Republican Dick Armey.

Rep. Barney Frank: His second-most famous comment was: “Markets are smart and government is dumb.” Of course, when the dumb government had to bail out the smart people at Bear Stearns, we didn’t hear from him.

Frank wants to trade access for access. The government would have the last word on risks financial institutions take, and those would get help from the Fed when they’re in trouble. The Wall Street Journal’s Steven Moore says the idea makes him cringe.

Steven Moore: You know, risk shouldn’t be treated as a four-letter word, as if it’s a dirty word. The people who should be making the decision about what a prudent risk is are the people that are investing their own money.

But, says David Jones of DMJ Advisors, it’s easier to argue against regulation of risk in good times. And he says this is the first time things have gotten really bad since huge risks became the centerpiece of Wall Street a few decades ago.

David Jones: We just have never had a crisis large enough to test each of these areas of leveraged risk taking with a big credit crisis — ’till now.

But Jones has reservations about Frank’s proposal, too.

David Jones: The only hope I would have is that they would not throw a government blanket over all risk-taking, which is vital to the operation of our successful capitalist economy.

In Washington, I’m Jeremy Hobson for Marketplace.

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