New Rules: A Guide to Electric Market Regulation Book

I don't know why I keep reading about the financial crisis of 2008, it just makes me angry. Anyway, this is a one of the several good books I've read on the subject. It has a longer term focus than some, including a section on the history of banking in the United Staes since the founding of the republic, and doesn't give a blow by blow description of what happened in the week that Lehman brothers failed. Rather, it is more about how the banks and the regulatory system got into this fix in the first place. The authors do a better job than most in explaining the jargon behind financial transactions, starting with the basics (such as, what is a bond?). I think I can summarize their conclusions as to how the mess got so big as: 1) to make big money on financial transactions you need to borrow a lot of money short term, which can go badly very quickly when you loan it out long term and your creditors know things are going badly; 2) a lot of new ways of loaning money or taking bets on other people's transactions were invented, because you can't charge high fees on plain vanilla financial products, 3) they found lots of buyers for these complicated products who didn't know what they were getting into or, if they did, figured that nothing bad would ever happen to them, and 4) all this occured in an intellectual climate in which it was believed that minimal government regulation of the financial sector was good for economic growth. Ignorant sub prime home buyers can't take most of the blame because there was a parallel bubble in commercial real estate, fannie mae and freddie mac were mostly not to blame as they couldn't engage in subprime lending, but there certainly was some poltical pressure in both the Clinton and George W. Bush administrations to increase the proportion of American households owning their own homes.

The authors' advocate a cap on the size of banks as a proportion of gross domestic product as the best way to keep future mistakes from getting out of hand. They also support the idea of a consumer financial services regulatory agency. The book was written while legislation was being considered but before federal financial regulation was modified, so I can't say to what extent their secondary suggestions, such as consumer finance regulation, were in enacted. They seem to be hopeful that eventually effective restraint will be enacted, referring to the 6 year gap between the financial panic of 1907 and the establishment of the federal reserve, and then the roughly 22 years after that in which the federal reserve gained an effective organizational structure. I'm less optimistic.