Tuesday, September 30, 2008

Deregulation did not cause this crisis

It's very important to dispel the myth that the current financial crisis was the result of deregulation. As Peter Wallison notes in this article:

There has been a great deal of deregulation in our economy over the last 30 years, but none of it has been in the financial sector or has had anything to do with the current crisis.

The repeal of portions of the Glass-Steagall Act in 1999 has no relevance whatsoever to the financial crisis, with one major exception: it permitted banks to be affiliated with firms that underwrite securities, and thus allowed Bank of America Corp. to acquire Merrill Lynch & Co. and JPMorgan Chase & Co. to buy Bear Stearns Cos. Both transactions saved the government the costs of a rescue and spared the market substantial additional turmoil.

None of the investment banks that got into financial trouble, specifically Bear Stearns, Merrill Lynch, Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc., were affiliated with commercial banks, and none were affected in any way by the repeal of Glass-Steagall.

It is correct to say that there has been significant deregulation in the U.S. over the last 30 years, most of it under Republican auspices. But this deregulation -- in long-distance telephone rates, air fares, securities-brokerage commissions, and trucking, to name just a few sectors of the economy where it occurred -- has produced substantial competition and innovation, driving down consumer costs and producing vast improvements and efficiencies in our economy.

Republicans have favored financial regulation where it was necessary, as in the case of Fannie Mae and Freddie Mac, while the Democrats have opposed it. In 2005, the Senate Banking Committee, then under Republican control, adopted a tough regulatory bill for Fannie and Freddie over the unanimous opposition of committee Democrats. The opposition of the Democrats when the bill reached the full Senate made its enactment impossible.

8 comments:

Lynn W said...

So, how do we spread the word?

Scott Grannis said...

I deleted parts of the article, but it is still fairly short and concise. Send it to everyone you know?

Lynn W said...

It's the people I don't know--the ones who rely on Katie Couric for their information--who need this perspective. How do we crack through the thick walls (skulls?) of MSM?

CDLIC said...

Scott,

Excellent article. I will distribute it far and wide. To start I will send it to a popular blod at www.pamamasmedia.com.

Keep the info coming.

CDLIC

rufus mcbufus said...

So it's now 2010 and I still say you will eat these words. Glass Steagall must be brought back and you are desperately wrong about there being no debt crisis.
-rufus

Scott Grannis said...

I'm even more convinced today that the root cause of the crisis was not deregulation. It was government intervention in the markets.

rufus mcbufus said...

You mean like the government intervention that repealed Glass Steagall or was that repeal the kind of government "disintervention" you are all for? I'm convinced the current government intervention is a mere attempt to fill a debt-hole that erroded over the last 20-30 years. This hole cannot be filled. I guess time shall tell. Now, did the government cause the hole in the first place? Maybe we might be in some agreement there but this was by no means a government-only failure.
-rufus

JackRiston said...

Scott,

I was a Sr. Loan Center Manager for many of the years leading up to the housing crises. I can agree 100% with your statement that the financial and housing bubble was not due to deregulation. If anything it was over regulation. When the word came down that we had to make loans without income documentation, etc, etc, I knew the industry was doomed. It took a little longer to tip over than I expected, but it sure did belly flop.