Nightmare on Deregulation Street
The greatest fallacy of government deregulation of financial institutions is that it’s been great for the economy.
That proved to be catastrophically wrong after savings and loans were deregulated and looted.
That has again proved to be catastrophically wrong after banks were deregulated and allowed to dive into the subprime mortgage cesspool, which among other things has resulted in an historic credit meltdown.
Then there is the arcane world of credit default swaps, which in theory are supposed to cover losses to banks and bondholders when companies fail to pay their debts, an increasingly common occurance as the economy walks, talks and acts like it’s in recession.
Credit-swap market securities have mushroomed to more than $45.5 trillion, about twice the size of the entire U.S. strock market.
But this industry has not been deregulated. As Gretchen Morgenson reports today in a deeply troubling New York Times story:
“No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.”
More here.
7 Responses to “Nightmare on Deregulation Street”
Sometimes regulations are a good thing. Perhaps in some future fantasy, pragmatic Democrats and Republicans can sort out what regulations are most cost effective.
It just goes to show that regulation is needed to protect the financial industry from itself as much as anything else.
But..but…just ask any of what passes for a fiscal conservative today and you'll find out that the free market doesn't make any mistakes. Ever. Of course that's why I call them The First Church of Free Market and consider them complete loons since somehow they never consider stupidity like “securitization” and other “financial instruments” that claim to insulate from risk while offering amazing returns on investments. Wall Street, the place in America where huge rewards are reaped for producing nothing but BS that no one dares name BS.
Well Jim, let me attempt to preach the gospel then. “Deregulation” doesn't cause anything. It allows people to make their own decisions. You can blame people or organizations, but “deregulation” is not an actor.
But here is the most pernicious part of the story above:
“That has again proved to be catastrophically wrong after banks were deregulated and allowed to dive into the subprime mortgage cesspool, which among other things has resulted in an historic credit meltdown.”
A subprime mortgage is one that is offered to a person that normally could not afford one. So by “cesspool”, the writer is referring to low-income people — not intentionally of course, but unequivocally.
The default rate is around 16% among subprime mortgages. Which means 84% of them are essentially successful, bringing mortgages to poor people that in previous years would not get them.
Regulating these kinds of mortgages makes it illegal to offer opportunities to poor people. Not intentionally, but unequivocally.
no sale, rich. I won't be converting.
We had to regulate foods and drugs because industry will risk public health to increase profit. We had to regulate monopolies such as utilities and cable because there is no alternative vendor (we can't have 10 sets of power cables to each house to allow competition). We have to regulate aircraft safety because companies will skip safety inspections and delay maintenance when the money is tight, or simply to increase profit.
Free marketeers are living a delusion; one in which market forces will force insurance companies to care more about public health than quarterly profits. They don't, They won't. Ever.
There has not been a case of deregulation working in the last 50 years, with the worst instance being the disastrous decade following the deregulation of the airline industry. Human beings will cheat and cut corners if they can. They will do it even w regs, but remove the regs, and there's nothing to chain the monsters of the id.
richvsreach, deregulation also allowed the Enron energy trading company to rig the California energy market, completely disregarding the harm it did to individuals in the state. The overall list of misdeeds by businesses that faced no regulation is too long to go into but I suggest you do some research on what Adam Smith had to say on the subject.