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More state intervention is always needed in a crisis

March 25, 2008

Silly season is back. As occurred several years ago with the mad rush to pass the disastrous Sarbanes-Oxley Act in the wake of the Enron collapse, Washington is preparing to use the imploding housing market as an excuse to ratchet up securities regulations. The trigger for a new round of rulemaking was the Fed's decision, as part of the Bear Stearns bailout, to allow investment banks to borrow directly from the discount window for overnight funding. Non-banks will now be able to get term funding from the Fed, pledging non liquid mortgage securities as collateral and getting US Treasuries in return. This has led both Democratic and Republican policymakers to agitate for increased regulation of investment banks, making it equivalent to that of commercial banks.

High profile free marketeers are seemingly unable to refute this logic, reminiscent of Sarbox. In a CNBC interview, Cato Institute chairman Bill Niskanen stated that more regulation may well be necessary to prevent the investment banks from unfairly gaming the system. He welcomed a new regulatory push by House Financial Services Committee chairman Barney Frank (D-MA), amid cackles of glee from the interviewers. Wall Street Journal editorialist Holman Jenkins has called for demolishing homes "with taxpayer money if necessary" in order to support real estate prices. Finally, economist Bruce Bartlett is calling for the repeal of $117 billion in tax rebates, instead giving that money to government-sponsored housing agencies (Fannie Mae and Freddie Mac) to prop up the mortgage market. Are we all Keynesians, now?

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