Deregulation didn’t do it

Patrick Gibbons

Our current economic crisis is more complicated than it is massive. Few people understand what is going on and even fewer know what to do about it. We know there is an investment banking crisis but not a traditional banking crisis (as of yet). Relatively speaking, unemployment numbers are not bad (especially when compared to continental Europe), and America's export industry is performing strongly. People on Main Street are still going about their lives as normal; it is Wall Street that is in a panic.

Nevertheless, fingers are flying in an attempt to point out who, or what, is to blame. This is, after all, an election year. Whoever can convince the voting populace that the other side is to blame will likely steer the nation's course for the next few years.

Left-of-center to moderate pundits, politicians, policy wonks and newspapers are busy blaming deregulation.

Deregulation, we are told, means less oversight. Less oversight means people can do whatever they want. Clearly, the mortgage and lending industry did whatever it wanted; therefore, deregulation failed us.

So what was deregulated? The only source of deregulation cited is the Gramm-Leach-Bliley bill of 1999. It removed Depression-era regulations, allowing insurance companies to merge with lenders.

So we are left with the impression that one deregulation caused the rapid rise in home prices, home building and home lending and ultimately caused the bubble to pop.

Sounds good – so long as you do not mention all the federal regulatory agencies that failed to stop or slow, let alone detect, the accelerating financial collapse – like the Securities and Exchange Commission, the Federal Deposit and Insurance Corporation, the Comptroller of the Currency, and the Federal Reserve. 

Do not forget about politically inspired mark-to-market accounting rules that economists now note is a big part of the problem. And, oh yeah, don't forget about the Community Reinvestment Act of 1977, which prohibits lending institutions from excluding low-income, high-risk individuals from getting mortgages and facilitated politicians' blackmail of banks that would not, immediately, take on high-risk loans.  The act was amended in 1989 and 1995 to increase the number of subprime mortgages – all in the name of creating more affordable housing.

Democrats, by the way, for years blocked tighter federal reins on Fannie's and Freddie's issuance of subprime mortgages, insisting that the now-bankrupt entities were fine, just fine, and that pumping out mortgages for people with really weak credit was a national and moral priority.

Speaking of Ms. Mae and Mr. Mac, these Government Sponsored Entities, don't forget about all their unscrupulous Enron-like practices that Federal agencies themselves documented and that Congress dismissed, blithely assuming that the obvious moral hazards the government was creating would not come back to bite America.

Deregulation was not the problem. We had massive regulation in place, and that model failed. Not only did the regulation and oversight that was in place fail to detect and stop the crisis, its wink-and-a-nod character, fostered incessantly by both Democrats and Republicans, actually tended to fan the flames. Finally, the obvious fuel behind the housing bubble was the Federal Reserve's easy-money and minimal-reserves policies, its "Greenspan Put" and then "Bernanke Put" in place for the last 20 years, effectively promising bailouts for the Fed's darlings – the highly leveraged Wall Street players who were Greenspan's and Bernanke's main constituents – when anything went south.

Well, it's definitely gone south now.