This selectivity is truly problematic. As much that I am against the widespread regulation (I actually did and published some work in this field in peer reviewed journal), I am absolutely appalled at the accommodation of higher leverages. Joe and Jane in Peoria, whose failure will not affect the economy at all, are allowed a 2:1 leverage on their margin accounts, but Bear Sterns is allowed 33:1? That does not make any sense to me. None whatever. The leverage had to be held in check and, in my opinion, this is yest one more example of the government failure (SEC).
Having said that and to be fair to the motives of the lobbyists, one has to remember that higher leverage provides higher returns in good times. It is intellectually dishonest, therefore, on the part of most critics to point to the disastrous events of 2008 as the result of leverage and other "unreasonable risk-taking by the execs." They said nothing of a kind when their stocks were going up as a result of that leverage.
What I said here is not an excuse --- am still adamantly against the leverages assumed by the WS banks. The (minor) point is that the banks' management were true to their mission, the job they were given to do: to provide the highest return to their shareholders. It's the government, whose job is to care about the MACROeconomic consequences, to oppose that tendency (which manifested itself as lobbying). If the managers assumed that their companies would be bailed out as too big to fail, they were UNFORTUNATELY correct: that was the message consistently given to them (until Lehman) by the government at least since the 1908s S&L bailout.
So I see here two GOVERNMENT (rather than MARKETS failure, as the Left is trying to convince the public): conveying a consistent message that the "too-big" will not be allowed to fail, and being lax on the leverage ratios.
[Actually, there is a third: the mark-to-market requirement that actually brought Lehman down, but I don't want to expand the scope of discussion. The main GOVERNMENT failure --- the ONE that precipitated the crash --- was of oourse the Community Reinvestment Act that MANDATED bad loans that could not have possibly been repaid. The rest was the reaction to that force that moved the market in search of an unsustainable equilibrium]
" I think we should be honest about the Bush years."
Exactly. Thank you for standing on position of principle rather than taking sides.
In my own view, the government is almost totally responsible for the economic reversal (whatever you might want to call it).
Sure, investment banks would nagturally push for a higher leverage factor. That's their job. If a government is going to effectively regulate that market, then it's government's job to resist that urge -- and not favor one party over another.
Then, of course, we have Fannie Mae and Freddie Mac distorting the mortgage market beyond all recognition -- removing mortgage companies from any risk by buying any mortgage they might write. Then, multiplying the problem by bundling these risky securities into derivatives and re-marketing them to the financial community to raise yet more cash. To buy more mortgages...
Finally, under the peculiar cirmcumstances, Sarbanes-Oxley was an aggravating factor that made a bad situation worse.
It took the federal government to turn The Panic of '29 into The Great Depression. This time, the federal government is the primary miscreant who started the whole thing.