Seen this column linked to by several people, and it raises the question once again of why newspapers allow people like Niall Ferguson column inches to spout astonishingly misinformed opinions about the banking crisis.

Ferguson is set on proving this assertion:

The reality is that crises are more often caused by bad regulation than by deregulation.

Fine.

Now let's see how he does.

If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth.

Sure. Who wouldn't accept that deregulation contributed to the asset price bubble that fuelled economic growth?

Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we're in now.

FAIL. This recession was engineered by the Fed to curb inflation (later recessions in the 70s were caused by a combination of Fed activity and oil price shocks). Regulation (and I presume he means in particular, banking regulation) had as much to do with these economic contractions as the gold standard.

Third, the continental Europeans -- who supposedly have much better-regulated financial sectors than the United States -- have even worse problems in their banking sector than we do.

There's a more ironic point to this later, but must be pointed out the main continental economies - Germany and Switzerland excepted - have not been faced with a mega banking crisis. The non-continental economies' banking systems - UK, Ireland, Iceland - happen to be in much worse shape. Even Eastern Europe, facing a far more serious economic crisis than that here, seems not to have all its banks on life support.

But seriously, is it really true that France and Spain and Italy have more screwed up banking systems than America? Evidence would of course be helpful, although what is certain is that he will find a pretty small number of bailed out failed insitutions in these countries.

The German government likes to wag its finger disapprovingly at the "Anglo Saxon" financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

Hello? Anyone home? Germany does have a banking crisis. Google "IKB" and "Landesbank failures" for starters. Germany, rightly or wrongly, think they've got a crisis because their bankers followed the "Anglo-Saxon model"; so far Ferguson has just dodged he issue that "Anglo-Saxon" banking had problems.

After a diversion about the merits of financial innovation and globalization and other Big Concepts that he does not understand, Ferguson goes for broke.

For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably.

FAIL. Huge, monster, stinking FAIL. The SEC does not administer national rules for banking capitalization. That would be the responsibility of the seven Federal Reserve banks and the Office of the Controller of the Currency. The SEC worked on broker-dealer capitalization - that Gramm-Leach-Bliley helped muddy the water in terms of who was responsible for what... more later.

It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks' balance sheets, so that (for example) the ratio of Citigroup's tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year.

Wow, okay, bear with me, the stupid is immense.

Basel 1 was replaced by Basel 2 because the former DID NOT risk-weight assets, certainly not well enough according to the banking regulation gurus. So Basel 2 came in and did a bunch of stuff that a lot of knowledgeable folks disagreed with, the most trenchant criticism being that the system was pro-cyclical, not that the risk-weighting methodology was techincally unsound (See anything Willem Buiter has written about Basel 2). But you'd think that for Basel 2 to be a cause of the banking crisis, it would have had to be around for a while.

Basel 2 came into effect at the start of 2008.

(And apropos the European banks, they are all subject to the Basel 2 rules as well. So the same capitalization framework, same regulatory baselines, and yet many Euro banking systems didn't get destroyed by Big Shitpile.)

Now, Citi with it's 56-1 leverage. Maybe the perfessor will tell us all what proportion of this leverage was caused by Citi's family of SIVs? Because the funny thing is that the SIVs were specifically set up to be off-balance sheet and therefore exempt from any capital charge on Citigroup. In fact, investors bought instruments called "capital notes" which were equivalent to SIV equity. Several other firms - see for example Standard Chartered, with its SIV called Whistlejacket, see Gordian with Sigma - actually allowed their SIVs to go bankrupt when they could not be funded. Citi instead decided to take their vehicles (total assets running into hundreds of billions) on balance sheet.

So yeah, was Citi leveraged to the eyeballs late in the day because it voluntary took on additional liabilities that were legitimately and purposely off-balance sheet to begin with? This is a pretty important point.

Anyhoo, Ferguson, still lacking any evidence to support his argument, plows on:

The good health of Canada's banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.

Ah okay, this might be helpful. Were the Canadians the only people smart enough to put a hard limit on leverage? Oh look, until 2004, they weren't -

Longstanding SEC rules required the broker dealers to limit their debt-to-net-capital ratio and issue an early warning if they began to approach the limit. The limit was about 15-to-1, according to the inspector general report, meaning that for every $15 of debt, the banks were required to have $1 of equity.

But the 2004 "consolidated supervised entities" program revoked these limits. The new program also eliminated the requirement that firms keep a certain amount of capital as a cushion in case an asset defaults. 

And also - banks with broker-dealer affiliates could operate under this looser, dare I say deregulatory-minded, SEC regime (thanks to Gramm-Leach-Bliley).

Ferguson, however, is still not done.

The biggest blunder of all had nothing to do with deregulation. [...] Negative real interest rates at this time were arguably the single most important cause of the property bubble.

Okay, here's the nub of it all. We had a major asset price bubble in the nineties. (Hell, we even had a mini credit crisis in the early part of this decade - Enron, Worldcom, Adelphia, Tyco etc bankruptcies felt expensive at the time.) But the bursting of the bubble did not lead to the mother of all solvency crises. In fact, there was not one single major bank failure through this period.

Odd that, if you subscribe to the Ferguson theory that the Fed's refusal to focus on asset prices when setting interest rates was the major policy blunder. Why didn't we have a giant banking crisis after the Dotcom party ended?

Well, Ferguson's bigger theme here, being the good historian (though lousy economist) that he is, is that we've got to learn the correct lessons from this crisis. I would venture one simple one - that listening to charletans like Ferguson is painful and potentially very dangerous.