Deregulation and the Economic Crisis (part1)
In case you are also getting fed up with the anti-government-intervention/anti-regulation rhetoric of the conservative free-marketer Republicans who have nothing better to offer as a remedy for the economic crisis than more of the same (tax cuts, and tax cuts and even… more tax cuts! - where does it end, no one knows...), here are a few facts and dates that show the correlation between deregulation and the current financial meltdown to throw at them :
- 1982 : The Garn-St. Germain Depository Institutions Act of 1982 : deregulated the Savings and Loan industry and allowed adjustable rate mortgages.
-1999 : the Gramm-Leach-Bliley Act eliminated the Glass-Steagall Act of 1933 which controlled speculation and separated investment and commercial banking activities, opening up competition among banks, securities companies and insurance companies (law was passed to legalize mergers like Citibank and Travelers Group, an insurance company, and in 1998)
Other restrictions which prohibited bank holding companies from owning non-financial institutions were also repealed by the same law.
-2000 : The 2000 Commodity Futures Modernization Act, “regulatory relief” provided deregulation for products offered by banking institutions. The law was partly written by Texas Sen. Phil Gramm, the free-marketer Republican chairman of the Senate Banking Committee AND lobbyists for Enron (the bill also exempted from regulation energy trading on electronic platforms - see the Enron scandal)
- 2004 : On April 28 the SEC (Securities and Exchange Commission) ruled that investment banks got rid of the Net Capital Rule which allowed "voluntary" inspection of the SEC and also meant that banks could essentially determine their own net capital. (In late September 2008, the commission decided to end the 2004 program of voluntary regulation.).
In fact, corporate self-regulation was the philosophical cornerstone of the Bush economic (and environmental) policy. But following the meltdown, even Christopher Cox, the former U.S. Securities Exchange Commission Chairman and longtime proponent of deregulation admitted lack of oversight helped cause the financial crisis.
"The last six months have made it abundantly clear that voluntary regulation does not work," Cox said in a statement, adding that the program had been shut down and authority to regulate investment banks had been transferred to the Federal Reserve. (NYTimes)
Don’t get me wrong: I’m all for capitalism (since there is no alternative anyway) and freedom but not free-market anarchism. Regulated capitalism is and has always been the right way to go and it suits our philosophy on this blog that true solutions come with moderation and that excess is often bad.
I’m always wary of incongruous and easy historical parallels but nonetheless I find it somewhat ironic than the Great Depression also followed a period of more laissez-faire economic policies in the 1920s (doing away with the regulations of the Wilsonian progressive era) during which the top tax rate was lowered to 25 percent and the stock market began its spectacular rise.
It is basically the same recipe and only the ingredients have changed a bit: too much borrowing, too much speculation with other people's money, and too little regulation.