Ferguson on Regulation and Deregulation

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis – or predicted the wrong crisis (a dollar crash) – have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). 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. 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. 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. 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.

Niall Ferguson writing in the NYTimes.  Recommended.

Comments

Look up "false dichotomy" in ye old list of logical fallacies. My goodness. I expect better of you, Alex.

Fair enough. It does, nonetheless, seem your quote takes Ferguson out of context.

Comparing IFRS to GAAP leverage? NOT recommended.

Ferguson points out an interesting issue, but then tries to have the resulting distinction both ways.

On the one hand, he suggests, fiscal cycles, with bubbles and all, just happen. We're bad at predicting them, and tend to overexplain them afterwards, often setting misplaced policies into place as a result.

On the other hand, he then does exactly what he claims we do so badly: for THIS bubble/crash cycle, he insists, 'financial innovation' was a good thing that had nothing to do with the crash, where as 'bad regulation' was a major cause and let to our current crisis. We should therefore fix the real causes, by cutting back regulation and making it better, and not be distracted by the good things, like naked credit default swaps on high-risk tranches of collateralized debt obligation derivatives based on pools of collateralized mortgages.

Right!

"First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). 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."

Or, perhaps, there is an optimal amount of regulation, we had too much in 1980 and too little in 2007, and we should look to someplace in between for where we ought to be.

use that world view to explain and instruct - no matter the outcome. Politics and rhetoric - gotta love it.

A corollary to this is that the Bush Administration is unfairly taking the blame for this supposed deregulation and its supposed consequences. Let's look at some of the signature legislative accomplishments regarding the financial industry during the last two administrations:

Who signed the Gramm-Leach-Bliley act (repealing Glass Steagall), as well as the Commodity Futures Modernization Act, and the Riegle-Neal Interstate Banking and Branching Efficiency Act? Bill Clinton.

Who signed Sarbanes-Oxley? Who tried, in 2003, to create a new agency in the Treasury Department to more carefully supervise Fannie and Freddie? George W. Bush.

Where's the Bush deregulation? It doesn't exist. It's manufactured outrage on the part of Democrats, many of whom (such as Dodd and Biden) are shameless lackeys for the largest and greediest financial services companies. Cynical, dishonest, manufactured outrage that is dutifully taken down and passed along by the lapdog steno pool that is our national media.

I also don't buy the argument that there was pressure on the executive branch for de facto deregulation. Who put Ebbers, Skilling, and Scrushy behind bars for decades, and would have hammered Ken Lay if he hadn't died? The Bush Justice Department, that's who.

These guys skated under Clinton, who used to play golf with (and accept big donations to the Democratic Party from) some of the worst offenders such as Lay.

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I still think the housing bubble largely facilitated by horrific tax and public policy gets under talked about by the left for obvious reasons. You dont have to tell me that everyone on Wall St. is Gordon Gecko and that is why the economy is in the tank. I already know that everyone on Wall St is largely a get rich quick, highly intelligent greed monger. However, I find it politically suspicious that the same Gordon Geckos who didnt wreck the economy in the 90's all of the sudden decided to ruin everything in the later stages of this decade.

In short blaming this recession on unchecked greed and a lack of political will over the finance class is boring. The left has to have a better political narrative. But maybe they dont and that is sufficient enough for political power.

Yeah, the Canadian anglo-franco financial model has pretty conclusively demonstrated that sensible banking regulations are rather good for both the country and for the banks themselves. Part of what made it happen was that there was a multipartisan consensus in favour of such regulations. (The Liberals and Conservatives enacted and enforced them when they've been in power, and the other major parties were not arguing for deregulation)

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