Mon Mar 8th, 2010 at 08:46:08 AM EST
Paul Krugman on learning from Ireland:
What really mattered was free-market fundamentalism. This is what led Ronald Reagan to declare that deregulation would solve the problems of thrift institutions — the actual result was huge losses, followed by a gigantic taxpayer bailout — and Alan Greenspan to insist that the proliferation of derivatives had actually strengthened the financial system. It was largely thanks to this ideology that regulators ignored the mounting risks.
So what can we learn from the way Ireland had a U.S.-type financial crisis with very different institutions? Mainly, that we have to focus as much on the regulators as on the regulations. By all means, let’s limit both leverage and the use of securitization — which were part of what Canada did right. But such measures won’t matter unless they’re enforced by people who see it as their duty to say no to powerful bankers.
When you pay people to make loans and don't enforce the rules, you're inevitably going to get a problem: I know for a fact that at the height of the boom that the banks here were taking big developers and investors out for lunch and asking them if they needed loans for anything. When low ranking bank officials said "no", they'd be overruled by senior people. Complete systems failure.