Julian Morris (International Policy Network) and Bill Stacey (Lion Rock Institute) have published How Not To Solve a Crisis (Nov. 2008). Given the current level of screaming that the crisis was caused by insufficient regulation, their thesis is worth attention. They think that four types of mis-regulation were crucial:
Second, US government sponsored entities, Freddie Mac and Fannie Mae, were required to buy up, securitise, and resell hundreds of billions of dollars of mortgages, with an increasing proportion coming from people on low incomes. . . .
Third, the existence of Federal Deposit insurance and other explicit and implicit government guarantees led to the mispricing of counterparty risk. Under the presumption that certain companies (such as major insurers) would not be allowed to fail, banks and other financial companies bought credit default swaps (CDSs), thereby insuring themselves against the failure of less privileged companies. Moreover, these CDSs, created opportunities to create synthetic credit structures, again purchased through SPVs, that added substantially to leverage in the financial system.
Fourth, governments granted privileged roles to certain ratings agencies, leading to over-reliance on those agencies in determining the risk of ABS, CDOs and other SIVs. [W]e now know that . . . serious errors were made in some ratings models and that liquidity and counterparty risks embedded within these structures were under estimated.
The piece is a useful counter to the assumption that a hysterical competition to create yet more regulatory structures to be gamed by the politically privileged is the road to salvation.