Tuesday, November 10, 2009

The Deregulation Myth

A popular myth among leftists is that the financial crisis was caused by "deregulation". Of course, when pressed on exactly what deregulation was involved, they usually can't give an answer, revealing a blind faith that whatever the problem it had to involve lack of regulation.

Among the minority of leftists that can give a more specific description of what regulation was lacking, the 1999 repeal of the Glass-Steagal act (which prohibited companies from pursuing both commercial banking and investment banking) is the most common reply. Yet there is no evidence whatsoever of that having any negative role. The companies that contributed the most to the bubble and subsequently suffered the most were companies that were either pure mortgage institutions like Freddie Mac and Fannie Mae, pure investment banks like Bear Stearns and Lehman Brothers or an insurance company (AIG which invested heavily in Credit Default Swaps that insured dodgy mortgages). None of those companies had been affected by the repeal of Glass-Steagal.

Veronique de Rugy has another interesting perspective on this myth by pointing out that spending on regulatory agencies has sky-rocketed in recent decades, even in inflation-adjusted terms. If there really was so much deregulation, then one should really expect such spending to fall or at least stagnate in real terms, not increase dramatically.