June 28, 2012 · 0 Comments
By Dean Baker:
The NYT has a good piece on how two of Spain’s top banking regulators went on to top positions at the IMF. They were hailed for their success in designing a regulatory structure in Spain that was widely praised for having designed a system that survived the 2008 financial crisis.
As it turns out, the Spanish regulatory system was not especially successful. The country had an enormous housing bubble and it was inevitable that when it burst, the banking system would face the sort of problems it is now seeing. As of the fall of 2008, banks had not yet recognized the enormous losses they had already incurred on their housing debt.
This should be a good lesson to ignorant experts everywhere: bubbles mean regulation failed. Countries with bubbles still waiting burst (e.g. Canada, U.K. and Australia) have a good financial crisis in their future. Get out some marshmallows to roast at the meltdown.
[Addendum: My reason for saying that the U.K., Canada, and Australia have housing bubbles is that house prices have gotten hugely out of line with rents. There have been large increases in the former over the last 10-15 years, while the latter have only modestly outpaced inflation. This will end very badly and the central bankers in these countries should be fired for not recognizing this fact.
On Spain and regulation, my point is that sound prudential regulation will not prevent bubbles. (I am taking the assessment of others that these systems were well-regulated. This is the responsibility of the central bankers. They are being unbelievably negligent to let these bubbles continue to grow. At the very least, everyone in a policymaking position should lose their pensions.]