Utopian Regulators
The people touting the market can plausibly say, “We never gave it a shot.” But those blaming the housing bubble on deregulation don’t really have a strong position. There really wasn’t deregulation, but instead changed regulation (or reregulation) after the changes in financial regulation that allegedly spawned the boom.
The mysterious von Pepe and I were emailing about credit default swaps, and how a bank could meet its capital reserve requirements by buying a CDS and (for purposes of regulation) effectively take the volatile asset off its books. The bank would still hold the volatile asset, but it supposedly now had taken care of the downside because of the CDS which acted as an insurance policy against default.
So as I said to von Pepe, “People keep saying that the CDS market allowed firms to evade regulation. No, the regulation allowed firms to use CDSs to evade capital requirements.”
