It’s Deregulation that Caused the Financial Mess?

By October 3, 2008Economy, Taxation

That line of argument will be used to justify expanded regulation over more than just the financial sector. But it’s malarkey.

Gerard Baker, Financial Times:

As I’ve argued before, the current collapse owes as much to government intrusion into the free market (the abominable hybrid of Fannie Mae and Freddie Mac; the regulatory requirement that banks lend money cheaply to those who couldn’t afford to repay it) as it does to the madness of free market savagery. There’s been precious little financial deregulation in the past ten years. The one big piece of liberalisation – the abolition in 1999 of Depression-era legislation that separated commercial and investment banks – has been a lifesaver, enabling investment banks to save themselves by merging with, or becoming, retail banks.

National Review, September 22:

Gramm-Leach-Bliley did not create securitization and collateralized debt obligations. It did not change the rules for banks’ leverage ratios. If anything, Gramm-Leach-Bliley mitigated some risks by allowing financial companies to diversify their businesses, and it is the most diversified firms that are best weathering the storm. Which makes sense: An investment portfolio is more stable the more diversified it is. The firms that have spectacularly imploded have mostly been non-diversified commercial banks, like Countrywide, or pure investment banks, like Lehman Brothers. But the broadly diversified megabanks are enduring — taking a hit from housing, sure, but they have other lines of business to sustain them. And we should not forget: Without the Gramm-Leach-Bliley reforms, Bank of America would have been legally forbidden to take over Merrill Lynch — very possibly leaving taxpayers on the hook for that one, too. Morgan would not have been able to buy Bear Stearns without Gramm’s reforms. 

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