Krugman Worth a Read Today

Paul Krugman's got a good piece in this morning's NY Times, looking at the housing bill and what it does and does not accomplish. It's worth a read, with Krugman coming down on the part of sanity and calling for tighter regulation of a wider variety of financial services entities:

... I hope nobody thinks that Congress has done all, or even a large fraction, of what needs to be done.

This bill is the latest in a series of temporary fixes to the financial system — attempts to hold the thing together with bungee cords and masking tape — that have, at least so far, succeeded in staving off complete collapse. But those fixes have done nothing to resolve the system’s underlying flaws. In fact, they set the stage for even bigger future disasters — unless they’re followed up with fundamental reforms.

Before I get to that, let’s be clear about one thing: Even if this bill succeeds in its aims, heading off a severe credit contraction and helping some homeowners avoid foreclosure, it won’t change the fact that this decade’s double bubble, in housing prices and loose lending, has been a disaster for millions of Americans....

...The back story to the current crisis is the way traditional banks — banks with federally insured deposits, which are limited in the risks they’re allowed to take and the amount of leverage they can take on — have been pushed aside by unregulated financial players. We were assured by the likes of Alan Greenspan that this was no problem: the market would enforce disciplined risk-taking, and anyway, taxpayer funds weren’t on the line.

And then reality struck.

Far from being disciplined in their risk-taking, lenders went wild. Concerns about the ability of borrowers to repay were waved aside; so were questions about whether soaring house prices made sense....

...The moral of this story seems clear — and it’s what Barney Frank, the chairman of the House Financial Services Committee, has been saying for some time: financial regulation needs to be extended to cover a much wider range of institutions. Basically, the financial framework created in the 1930s, which brought generations of relative stability, needs to be updated to 21st-century conditions.

The desperate rescue efforts of the past year make expanded regulation even more urgent. If the government is going to stand behind financial institutions, those institutions had better be carefully regulated — because otherwise the game of heads I win, tails you lose will be played more furiously than ever, at taxpayers’ expense.

Of course, proponents of expanded regulation, no matter how compelling their arguments, will have to contend with very well-financed opposition from the financial industry. And as Upton Sinclair pointed out, it’s hard to get a man to understand something when his salary — or, we might add, his campaign war chest — depends on his not understanding it.