September 14, 2008
Posted by Gordon Smith

This news about Lehman and AIG and Merrill is all more than a bit disorienting. "Chaos" is the word of the day in news reports.

What is going to happen on Monday?

Some people are talking about a massive sell-off of securities, but the early activity in Australia does not suggest historic movement. U.S. stock futures are down about 2.5%, but given the recent volatility in this market, that almost seems normal.

The big issue, going forward, is how the events of this year reshape our regulatory system. In a decade, will we look back on Bear Stearns, Frannie, and Lehman -- oh, and have you been paying attention to the problems at WaMu? -- in the same way that we look back on Enron?

My guess: no. Enron will be too modest an analog. By the time the dust settles, the New Deal will seem the more apt comparison.

By the way, let me second the praise for John Carney at Dealbreaker. John is all over this story, and we all benefit.

UPDATE: Steve Bainbridge responds:

That seems a little (okay, a lot) over the top to me. In the New Deal, we went from essentially zero federal regulation to massive federal regulation. It was like going from zero to 60. Today, we’re starting at 60 and going to maybe 70 or 80, at best (worst)?

This is not to say that the fallout will be trivial. The combination of the credit market problems, the housing market’s woes, Fannie and Freddie, and the mess on Wall Street likely will have regulatory consequences. Unless the Democrats in Congress decide to bring back Glass-Steagall, however, I don’t see anything of New Deal proportions happening.

This seems fair enough if you were focused only on the volume of federal regulation of the economic system. My point with the New Deal analogy is that this financial crisis is likely to promote wholesale restructuring of the federal regulatory system. Remember the Paulsen Plan? While that plan hasn't gotten much attention since it was floated in April, my point is simply that the fallout from this year's events could be something equally ambitious, and that seems more akin to the New Deal than to Sarbanes-Oxley.

UPDATE2: Welcome, Instapundit readers.

UPDATE3: Nate Oman has a nice post on Concurring Opinions celebrating the government's restraint. I agree with this:

This is undoubtedly a bigger event economically than Enron, and the regulatory response to that problem does not give me a great deal of confidence going forward. What I fear is less the markets, than what Congress is likely to do in response. It is the sort of thing that we might want to ask our Presidential hopefuls about, although the chances of a productive discussion on this between now and election day are ... low.

I hope that no one was interpreting my original post as a call to arms. I am not sanguine about massive government intervention, but this is precisely the sort of crisis that inspires Congress.

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