DeLong Smackdown Watch: Doug Elmendorf on the Subprime Meltdown
Hoisted from Comments: Doug Elmendorf writes:
Brad DeLong--Economics Only: What Is to Be Done? (About the Subprime Meltdown, That Is): Thanks for linking to my notes. I think you misunderstand my point #5, where the key word is "federal." Ned Gramlich pointed out that half of subprime mortgages in 2005 were issued by mortgage companies chartered and supervised by the states (compared with essentially no prime mortgages), and that the problem mortgages are heavily concentrated in that sector. He concluded in his book that all mortgage lenders should be covered by a federal supervisor. Others have argued that federal supervision is important for the Fed's ability to restore liquidity to these institutions.
However, in Ned's Jackson Hole remarks, he said that the same regulatory end might be achieved by collaboration among federal and state supervisors, which was already underway. My notes cited this point and added some other reasons why I thought replacing state supervision with federal supervision was not needed (at least for these reasons--whether our overall supervisory structure makes sense is a harder issue). I was not arguing for no supervision of these institutions at all. I wonder, though, about your argument that any institution "borrowing short and lending long" is like a bank and needs to be regulated. I see your logic, but doesn't it apply to essentially all issuers of commercial paper?
On my point #6 about credit ratings agencies, I wish I had better ideas than I do. But regulators can, at the least, illuminate the potential conflict of interest between rating securities and soliciting business from securities issuers, and generate more separation between these functions within those organizations. However, I would not (and hope I do not in my notes) overstate the likely effectiveness of these steps.
Perhaps I am an old-fashioned person, but I believe that no rating agency has any business rating any commercial paper AAA or AA unless that commercial paper is in fact commercial paper--unless it is collateralized by short-term accounts receivable. That is, in its origins, what commercial paper is: you have short-term accounts receivable and you want to turn that wealth into something liquid, so you sell your short-term accounts receivable for cash.
