A mixed message on subprime from the IMF

A report from the International Monetary Fund acknowledges that the system could be tweaked to work better. But don't go too far!

By Andrew Leonard
Published September 25, 2007 1:29AM (UTC)
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Here's how the International Monetary Fund's Jaime Caruana summarized the conclusions of a new IMF report that discusses recent financial market disruptions in the wake of the subprime mortgage debacle. Governments should not "rush to regulate everything," Caruana told the Wall Street Journal.

But who exactly has been suggesting such rabble-rousing radicalism? Let's pull a name out of the hat: Massachusetts Democrat Barney Frank, the chairman of the House Financial Services committee. If anybody's going to play a key role in coming up with new regulations for financial markets, it's likely to be him. Why, just a week ago, he published an opinion piece in the Boston Globe that made a nuanced case for new levels of oversight.


The odd thing is, if you read the executive summary of the IMF report, you will find a clear and nuanced acknowledgment that some changes do need to be made.

In the U.S. mortgage market, the public sector costs associated with the lack of supervisory oversight of some mortgage originators will need to be balanced against the improved access to credit that some households received. Generally, the relationship between checks and balances throughout the supply chain of structured products may require some rethinking...

Policymakers now face a delicate balancing act. They must establish frameworks that encourage investors to maintain high credit standards and strengthen risk management systems in good times as well as bad. Actions should only be undertaken if the public policy benefits outweigh the costs, taking care to thoroughly examine possible unintended consequences.

And what was it that Barney Frank said, again?

Well-functioning financial markets depend on transparency and confidence that institutions are playing by clearly defined rules. Both were in short supply in the months leading up to the August meltdown and remain so today ... We lack the information that we need to ensure safety and soundness as well as the confidence that comes from the requirements mandating governance and reporting standards that apply to publicly traded companies.

Our job is to understand the changes in the financial marketplace and consider what we must do to ensure that our regulatory system is able to keep up with those changes. Innovation is as important in financial markets as it is in product markets, but it would be foolish to act as if regulatory structures, designed for a different world, do not have to be as nimble and innovative as those they regulate.

It is not surprising that the Wall Street Journal chose to lead off with a quote about not rushing to "regulate everything," even if no one is actually suggesting that we do so. That fits nicely into the "Democrats only want to regulate," "Republicans only want the free market" pattern of what passes for policy debate in the U.S. What would have been more provocative, however, is some exploration of where the kind of new oversight imagined by Frank intersects with the kind of "rethinking" the IMF recommends. But that would require moving beyond a framework that posits regulated vs. unregulated as an all-or-nothing ideological battle. What about all of those people who just want the system that works best for the greater good?

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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