I completely agree with the authors contention that the big problem with the economy is that we stopped capitalizing innovation - and too much of our captial was diverted to "get rich quick" private equity.
I completely disagree with his focus on government over-regulation (and over-reaction) being a (primary?) cause of that slosh.
If one were to look for a foundation block for the shift from innovation to equity it would likely begin with the multitude of deregulations during the Reagan era. Specifically, from 1980 to 2000, the government chipped away at the financial regulations that had been imposed after the Great Depression. The HEIGHT of the American industrial climb and innovation run amok was precisely when these regulations were in full effect.
The HUGE problem is that given a *choice* between "get rich quick" (equity) or "get rich slow" (innovation) - QUICK is going to trump slow 98.6% of the time. The damage was done with the tearing down of the wall between investment banking and commercial banking. The death of Glass-Steagall was just the final straw.
When it will take 30 years to make your profits on a mortgage, it's in YOUR best interest to make "reasonable" loans. If you can magically turn ANY mortgage into a security and resell it instantly, all prudence goes out the window, because a worthless $800K mortgage is actually much more profitable than a solid $160k.
SOX was probably the wrong over-reaction to WorldCom and Enron and Tyco - but clearly there needed to be a reaction. *CONFIDENCE* in the solidity of an economic entity has gigantic value. Why were mortgage backed securities soooooo attractive? Because they were practically gold in terms of performance over nearly 100 years. You KNEW that American mortgages were 99% solid. Why? Because American banks were REQUIRED BY LAW to very exacting, (and annoying, and expensive) standards. And the solidity of the market died the day the banks managed to get most of those minimum standard thrown out.
The market NEEDS both commercial and investment banking. But, the market showed back in 1929, and again in the first decade of the 21st century, that the two do NOT mix.
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Misallocation of cause
I completely disagree with his focus on government over-regulation (and over-reaction) being a (primary?) cause of that slosh.
If one were to look for a foundation block for the shift from innovation to equity it would likely begin with the multitude of deregulations during the Reagan era. Specifically, from 1980 to 2000, the government chipped away at the financial regulations that had been imposed after the Great Depression. The HEIGHT of the American industrial climb and innovation run amok was precisely when these regulations were in full effect.
The HUGE problem is that given a *choice* between "get rich quick" (equity) or "get rich slow" (innovation) - QUICK is going to trump slow 98.6% of the time. The damage was done with the tearing down of the wall between investment banking and commercial banking. The death of Glass-Steagall was just the final straw.
When it will take 30 years to make your profits on a mortgage, it's in YOUR best interest to make "reasonable" loans. If you can magically turn ANY mortgage into a security and resell it instantly, all prudence goes out the window, because a worthless $800K mortgage is actually much more profitable than a solid $160k.
SOX was probably the wrong over-reaction to WorldCom and Enron and Tyco - but clearly there needed to be a reaction. *CONFIDENCE* in the solidity of an economic entity has gigantic value. Why were mortgage backed securities soooooo attractive? Because they were practically gold in terms of performance over nearly 100 years. You KNEW that American mortgages were 99% solid. Why? Because American banks were REQUIRED BY LAW to very exacting, (and annoying, and expensive) standards. And the solidity of the market died the day the banks managed to get most of those minimum standard thrown out.
The market NEEDS both commercial and investment banking. But, the market showed back in 1929, and again in the first decade of the 21st century, that the two do NOT mix.
Techdirt has not posted any stories submitted by Sandy.
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