Maybe the government did cause the financial crisis - through regulation

I've blogged about the fact that Obama is talking nonsense on the financial crisis. McCain wants to undertake a thorough study of its causes and Obama ridicules the idea. We know how we got into this mess, he says, we need the change that will get us out.

But he has offered neither a diagnosis or a course of treatment. On the cause of the problem, he essentially offers two arguments. The first is that there is some kind of culture of greed created by George W. Bush and John McCain. This is unworthy of anyone who has even walked across Harvard Yard. We've had giant businesses collapse either due to speculation or misstatement of their financial condition before. Enron did not begin its skullduggery on January 20, 2001. The tech bubble occurred during the Clinton era, etc.

The other argument is that there was some culpable deregulation during the Bush administration but I've yet to see an explanation. In fact, there was a monumental increase in regulation called Sarbanes-Oxley and, although it did not pass, John McCain co-sponsored a bill that would have increased regulation of Freddie and Fannie. Obama did not co-sponsor that bill.

McCain's current rhetoric is only marginally better. He is blaming corruption and greed and no doubt we had some of that, but the real causes are probably more complicated that and may not fit comfortably into the narratives of the right or left.

There is a fascinating article by Zachary Karabell in this morning's Wall Street Journal. He starts with something that has puzzled me. The housing market is down, but it's not that bad. There is an increase in foreclosures but the percentage of mortgages in foreclosure and default is still very small. Why would a significant, but noncatastrophic decline, lead to a catastrophe?

Karabell argues that it is a result, not of Bush era deregulation, but of Bush era regulation, in particular, the "mark to market" rules dictated by Sarbanes-Oxley. As explains it, SOX reguired that a company's assets be revalued quarterly as if they were to be immediately sold. If there would be no buyer now, then the value is zero.

This is hyperconservative. One doesn't sell when the market is down and today's price may not reflect long term value. But if the assets must be written down, the balance sheet - and the company - collapses.

This was an unintended consequence. Karabell is not arguing for no regulation (he makes the point that no regulation at all means no market), but for good regulation and for the need for regulators not to overreact to the most recent problem.

How powerful is Karabell's explanation? I don't know but it seems like a serious effort to address the problem, albeit one that doesn't fit the narrative of our political campaigns.