“No government policy or regulation can force any bank to make a risky or
otherwise loan nor can it force any bank into taking higher risks.”

If the government is implicitly subsidising risk, by stating it won’t let institutions fail, then this is what they are doing.

“my main additional point is that, even without firms committing fraud the structure of regulation pushes excessive risk taking.”

I completely disagree.

No government policy or regulation can force any bank to make a risky or otherwise loan nor can it force any bank into taking higher risks.

Banks decide to make a loans based on whether or not it thinks it can make a profit.

Governments cannot set the quantity of bank lending only the price.

The crisis could have been prevented if the authorities had simply enforced the law.

They had the advantage of having an example of a successful regulatory response, the S&Ls, to exactly the same sort of crisis but they instead fell victim to regulatory capture.
The S&L crisis demonstrated how regulation could be effective.
Fraudulent institutions were identified & put into receivership, the criminals indicted, prosecuted & convicted.
Over a thousand high ranking execs were prosecuted, convicted & jailed with a conviction rate of ~93%.

That isn’t quite what I’m getting at, it is through the lens of taxation – as in through the idea of the redistribution of goods and services!

The “demand” issue is one of co-ordination, and one which (outside of the ZLB) a central bank deals with through adjustments to the cash rate.

I suspect there is a lot more agreement about much of this between all the sides than there often sounds like there is – when I say “lens of taxation” I am not trying to say anything is good or bad, just that the method we use to analyse taxation is a useful framework for understanding broad govt financing and spending decisions.

I don’t disagree with that in itself – my main additional point is that, even without firms committing fraud the structure of regulation pushes excessive risk taking.

In NZ we don’t face the fraud, but the regulatory structure is still an issue of interest – this is probably why my focus goes more down those lines!

No.
In Monetarily Sovereign nations taxation does NOT fund federal spending.

Taxes regulate aggregate demand & ensure currency demand.
The Federal Government spends, issuing new currency, simply by crediting accounts.

The crisis was caused in large part by massive Accounting Control Fraud.

The fraud recipe has four ingredients.
1) Grow extremely rapidly by
2) Making or purchasing crappy loans or derivatives at a premium yield while
3) Employing extreme leverage and
4) Providing only trivial allowances for the inevitable eventual losses

The fraud recipe produces three sure things.
1) It guarantees that the firm that follows the recipe will report enormous (albeit fictional) income in the near term. (If many firms in the same industry follow the same recipe and use the same ingredients they will hyper-inflate financial bubbles. This can greatly extend the life of the fraud because losses on the bad loans will be hidden by refinancing. The saying in the trade is that “a rolling loan gathers no loss.”)
2) Modern executive compensation, which the CEO typically determines, guarantees that the record reported income will promptly make the CEO wealthy.
3) The fraud recipe also guarantees that the firms will suffer massive losses, (particularly if the frauds hyper-inflate a financial bubble.)

“No government official, law, or rule required any mortgage lender to make liar’s loans or any entity (and that includes Fannie and Freddie) to purchase liar’s loans or CDOs.”

See: William K Black.

That is fine, but we can only make sense of what that means if we view the choice of funding through the lens of taxation! It is indeed a distributional issue.

All good, thanks for the apology 🙂

I think fraud is a bit strong – there are issues in the institutional structure, and it does act as a transfer, but people pay asset prices willingly with all available information (which means they have significant uncertainty about the future).

Should banks bear more risk? I believe so. But in this post I was more trying to note that the version of economics being criticised is one that doesn’t exist among economists, and one that economists try to disagree with if people do use it 🙂

What he’s basically saying is that Monetarily Sovereign nations don’t have to issue interest bearing debt at any rate. But if it does decide to issue debt it can do so at the rate of its choosing.

I apologize.
I misread your post.

The key element in almost every asset bubble is Fraud.