The Corner

Blowing Smoke

In Friday’s column, Paul Krugman says that Senate minority leader Mitch McConnell’s opposition to Sen. Chris Dodd’s financial-regulation bill is like “call[ing] for the abolition of municipal fire departments.”

Krugman asserts that McConnell opposes the Dodd bill because it would provide regulators with a way to put out big financial-industry “fires” instead of forcing the regulators to “stand aside while an urban office building burns” and spreads damage through the city.

A more appropriate fire analogy for financial-regulatory reform would be as follows:

What the Dodd bill should do is require regulators to enforce a clear and simple fire code that all real-estate developers must abide by, with the aim of preventing conflagrations rather than putting them out. That is: propose and enforce clear rules on building materials, sprinkler and exit placements, etc.

What the Dodd bill does do is ask regulators to determine in exactly which building or neighborhood the next fire will break out — and enforce different rules in each of those neighborhoods and buildings.

Maybe one office-building owner, for example, convinces the regulators that he’s never had any history of fire and that, in fact, he has invented a super-complex technique that eliminates the risk. So, regulators allow him to avoid the strictest rules on fire-retardant materials and fire exits. This owner can raise debt cheaply — because his lenders, although they don’t know much about buildings or fire, do know that the government approves of his arcane methods.

Maybe, too, the government has a lot of oily rags that it wants to store somewhere. With encouragement from regulators, this building owner decides that his building is a great place to store it. It’s unlikely that other tenants will even notice the floors full of Treasury and mortgage debt oily rags, the owner and the government figure.

Finally, let’s say that the government and its favorite office-building owner are wrong. The building does burn, taking smaller, older real estate in surrounding blocks with it. Those little guys — or their lenders and insurers — lose.

But the government spends billions of dollars of taxpayer resources to protect the shell of the burned-out office building and provides its owner with materials and labor to rebuild over several months, so that he can sell it — almost like new! — and pay off his lenders and insurers.

Nicole Gelinas, contributing editor to the Manhattan Institute’s City Journal, is author of After the Fall: Saving Capitalism from Wall Street — and Washington.



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