How Much Did Deregulation Contribute To The Recession (Economic Slowdown, Whatever)

Deregulation refers to the point at which the U.S. government threw up its hands and said “all right banks, power companies, airlines, etc., do whatever you want!” and the deregulated industries had a big party. Eminent jurist and economic theorist Richard Posner says that might have been a mistake: “a tighter ceiling should be placed on the risks that banks are permitted to take.”

The problem? The ever-present bailout guarantee. Banks’ money comes from depositors (us). Deposits are insured by the FDIC so that if the banks lose our money, we get it back. We are insured. So we don’t care if the banks lose our money or not, which means nobody is really pressuring the banks to behave.

And why would they, since they can expect a bailout from the government. If they fail, they take the economy with them? But the only entity that is not insured–the government, including its own depositors, the taxpayers–gave up by deregulating. (Okay, not completely, but let’s be honest, the government is regulating the banking industry about as much as I regulate my cats.)

Posner says he thinks the big banks knew exactly what they were doing: that it was risky, but that they could get away with it because they “are . . . considered by federal regulators too large to be permitted to go broke.”

(Also, Greenspan was apparently a huge Ayn Rand fanboy.)

(photo: zieak)

Comments

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  1. kittenfoo says:

    Paul Krugman has been saying this since 1998. It’s only now that people are seeing the wisdom in it.

  2. ShortBus says:

    Rand had a profoundly influential role on Greenspan’s intellectual development. He devotes a lot of ink to describing his meetings with her in his biography. However, that little post-script was a pretty blatant ad hominem attack.

  3. TechnoDestructo says:

    “the government is regulating the banking industry about as much as I regulate my cats”

    I don’t know how you regulate your cats, but I don’t think they’re even going as far as I do with mine. I think my approach with pets would work for regulation in general.

    Pretty much let them do what they want and give them what they want, but if they start getting destructive or start doing things that could kill them, immediately smack them so they get the message that that isn’t cool.

    There has been entirely too little smacking.

  4. CRNewsom says:

    @TechnoDestructo: Your newsletter, sir, I would like to subscribe to it.

  5. Crazytree says:

    unfettered capitalism will destroy itself.

  6. BigElectricCat says:

    This is apparently the ‘invisible handjob’ that Adam Smith wrote about.

  7. laserjobs says:

    The Fed backstops “too big to fail institutions”. Just take a look at the JPM – Bear Sterns bailout. Removing the depression era Glass-Steagall Act by allowing banks and brokerages to combine is a lot of the problem we are now facing.

  8. Sam Glover says:

    @ShortBus: I just thought it was a neat factoid.

  9. jeff303 says:

    @ShortBus: Agreed. I’m so tired of this specious kneejerk attack on Rand being posted every damn place. For anyone who cares about the truth: the relationship between Rand and Greenspan isn’t quite so hunky-dory as some suggest. Most of his most egregious behavior occurred after his death (he wasn’t even appointed as the Fed chairman until 5 1/2 years after her death).
    [www.noblesoul.com]

  10. jeff303 says:

    @jeff303: Er I clearly meant “after HER death.” Curse the lack of edit button!

  11. johnva says:

    @ShortBus: I’m not so sure it’s ad hominem if it’s relevant to the subject of the article (and it is, even if the article fails to elaborate on why that is).

  12. johnva says:

    @jeff303: How is when Rand died in any way relevant to whether her influence on him affected his decision-making?

  13. jeff303 says:

    @johnva: Good point. Basically there is no evidence that Rand ever commented on how well Greenspan was following “her ideas.” She influenced him at some point in his career but it’s not clear whether she would have approved of what he did during his time at the Fed. Rand and the ARI (the closest to an “official” Objectivist organization these days) have stated repeatedly that the very existence of the Fed is an affront to her ideas so it’s difficult to imagine she would ever endorse Greenspan’s later career.

    To put it another way, Charles Manson was influenced by The Beatles but that shouldn’t reflect poorly on them.

  14. Comms says:

    Big shock, you get rid of consequences and people take advantage of the system for their own benefit to the detriment of everyone else.

    “Greenspan was apparently a huge Ayn Rand fanboy”

    Um. Greenspan was part of Rand’s “inner circle”. He’s a bit more than just a fanboy, he drank the fucking koolaid.

  15. petrarch1608 says:

    The consumerist’s writers can’t even read a Best Buy coupon’s expiration date, they’re not really in any position to opine about the ups and downs of the economy.

  16. thegirls says:

    @petrarch1608: Wow, then why are you here? If you don’t like there opinion, go somewhere else!

  17. dtmoore says:

    Everything worked as it should have, except the government should have let the banks go under. They took a risk and deserve to suffer the consequences. Yay capitalism, or corporatism, or socialsm, or whatever we are these days :D

  18. petrarch1608 says:

    href=”#c5415445″>thegirls: i’m here cause i like the cheap stuff. There’s a lot of practical stuff on here that i like

  19. thegirls says:

    @petrarch1608:
    understood

  20. mikelotus says:

    Ben Stein had a nice article in yesterday’s NY Times, pretty much putting a large part of the blame on the SEC and Cox. [www-307.ibm.com]

  21. SloppyChris says:

    @dtmoore:

    It’s about time someone said that.

    Bailouts and the federal bank are the craziest form of “deregulation” I’ve ever heard. If the government had actually committed to letting people make their own decisions and face consequences, we’d be in much better shape.

    Instead, we live in a nanny state where the people who make good choices are punished and forced at gun point to provide for those who don’t those who don’t.

    It’s a perverse form of capitalism, yet somehow capitalism gets the blame.

  22. Dillenger69 says:

    Much like corporations that move production to countries with less regulation so they can work people to death or pollute …
    Just because something isn’t illegal doesn’t mean it’s not wrong.

  23. TheFlamingoKing says:

    Man, these banks are so evil! We should go after the owners!

    Wait, what? I’m one of the owners? Oh, crap, I forgot – I have that pesky retirement account. But I thought I was giving my money to Fidelity, not the banks…

    You don’t say? You mean to tell me that millions of people around the globe own these companies, and rely on them returning a profit in order to retire someday?

    So your trying to tell me I’m the greedy one? Me and millions of others? Man, this was so much more fun when we were blaming rich white guys…

    @SloppyChris: Thank you. I was planning on making your point before you made it for me.

  24. ThomasD3 says:

    It’s funny, we still have people claiming markets regulate themselves and we should be free of government interference, etc, even though we get another proof it doesn’t work almost every week.

    As another poster said: gov should let the banks collapse; that’s true ‘free market’, but that seems less interesting now and suddenly we’re crying for gov help…

  25. Trai_Dep says:

    @dtmoore: Except of course, that outcome is something outside the realm of human experience.

    Ann Rand is much like Karl Marx. A theorist whose utility collapses on the shores of reality.

  26. petrarch1608 says:

    @ThomasD3: says the guy whose stomach is full because of the work of the markets.

  27. JustaConsumer says:

    Still paying the price for the “Great Fornicator” Ronald Reagan. He screwed the country whilst all the while acting folksy. If people say they are a Reagan conservative, watch out, they will take your money.

  28. Ssscorpion says:

    Well, if Posner and Krugman say deregulation is the cause of the recession, I can go to bed tonight certain of one thing: deregulation had nothing to do with the rececssion.

  29. mpjones says:

    So we have a giant central bank that keeps interest rates artificially low, then bails out the banks when they make stupid decisions as a result. That’s a funny kind of deregulation, there.

  30. vision646 says:

    “(Also, Greenspan was apparently a huge Ayn Rand fanboy.)”

    Boo on you, Consumerist. Ayn Rand was truly one of the greatest economic theorists to have graced this planet. Having experienced the horrendous conditions of the Russian “revolution” and its aftermath, and then what this country offers to all who live her, she favored capitalism.

    How many can truly say they have lived in both worlds? It is amazing how those who flee to this country love it and how so many of those born here hate it.

  31. stinerman says:

    @vision646:

    Rand didn’t favor capitalism. She outright demanded it.

    While the comment about Rand in the article was pretty weak, I’m not about to defend someone who thinks helping other people is a sign of weakness.

    People like Ayn Rand make me wish there was a hell so people like her could go to it.

  32. It’s only fair if business are allowed to do what they want, they don’t deserve a bailout. If they expect a bailout, they shouldn’t expect deregulation.

  33. ageshin says:

    The only thing I ask is who is going to give us a bail out.Who’s money was it that the banks used to jack up their profits, Ours. Who’s money is it that the goverment is bailing out the banks, ours! Regulation is the goverments way of making sure that our money is handled responsably. In every industry we have deregulated has gotten into trouble and usually costs us even more money to fix it. Government is never asked to save us, no only those who have bilked us out of our savings.

  34. Trai_Dep says:

    @postnocomments: that’s precisely a core critique to Randian poppycock in a nutshell. It’s a rationale for those that want to privatize the profits, socialize the losses.
    Sure, there was some novelty in the concept 20 years ago, but after watching vast swaths of our economy and country be ravaged under this, I feel pity for those that still fall for it. Must feel like Charlie Brown trying to kick the football just one last time…

  35. JustThatGuy3 says:

    @postnocomments:

    It’s worth noting that Bear Stearns’ investors are getting <10c on the dollar back, so not much of a bailout there…

  36. tz says:

    It is FALSE ADVERTISING to call socialized risk, or corporate socialism “deregulation”. No there are still lots of regulations (which favor the corporations). I’m for a free market, not one where the system is gamed either way.

    Alan Greenspan was to Ayn Rand what Judas Iscariot was to Jesus. And I’m not a particular fan of Rand or Randites, but to be fair, Ron Paul’s policies would be closer to what Ayn Rand would have done (and Paul reminded Greenspan several times during congressional testimony).

    That said, how many here took advantage of the artificially low interest rates? The cheap credit? And even the cheap goods when the dollar was still levitating?

    Can you find Consumerist type articles saying interest rates are too low today from years ago (warning about what every Austrian economist has been warning about for years)?

    I’ve done the audiobook of Free Lunch by Johnston, and will be getting the whole unabridged thing. It goes into these problems, but what he points out constantly is that SUBSIDIES AND EXEMPTIONS FROM LAWS are NOT FREE MARKETS and often quotes Adam Smith (Wealth of Nations) on the topic.

    The East India Company supplying Tea to Boston was NOT operating in a Free Market. Neither was Enron, nor the Banks. I couldn’t have chartered a bank to provide consumer-beneficial loans (nor even formed a credit union to do similar things). Why not? Regulation. But people here claim it was “deregulated”? No, the barriers to entry were all kept, but once in, they lowered the standards.

    But it is hard to have a discussion on economics when immunity from traditional common law is called “deregulation”, and other linguistic reversals. Freedom is slavery? Given what has happened to the language, I guess either word can mean either definition.

    And I think both Ben Franklin and Thomas Jefferson (though perhaps not Hamilton) would be horrified to find themselves on fiat (paper) currency. It is a mockery and insult. But I would use this example to note we probably do not know what Ayn Rand would say exactly about today, but that it probably would not be nice. And I think she would not mistake the Russian oligarch’s Mafia style organization – which we seem to be imitating – for capitalism.

  37. smoothtom says:

    @mikelotus: Ben Stein also just released a movie defending creationism. He’s a hack who’s looking for more money.

  38. savvy9999 says:

    Me me me objectivism is inherently incompatible with Christianity. The moral monstrosity called Ayn Rand would have wiped her ass with the Beatitudes. Maybe she was a great theorist– and a terrible novelist, btw– but her ideas should have no place anywhere near American economic policy.

    Alan Greenspan was not a perfect image of Rand’s philosophies, but he tried to emulate her ideas as best he practically could, and now we’re all left wondering why only a few have benefited from his policies. The unscrupulous get rich while the upright get laid off, all the while being forced to buy imported, substandard, poisonous goods. What else is new?

    Econ history will someday give a proper ugly name for the last 8-12 years, the Clinton-Bush-Greenspan-Cheney era, when the dollar died, oil became king, ill-conceived war sunk the US treasury, and objectivist policies conflated the internet & real-estate bubbles.

  39. jeff303 says:

    @Trai_Dep: If you think our economy over the past 20 years can be called “Randian” in any way then you clearly haven’t actually read her writing.

  40. Big Poppa Pimp says:

    Calling what the federal government did by bailing out Bear Stearns and misguided forms of regulation “deregulation” is completely absurd. The moral hazard caused by expected bailouts of failed businesses is not a part of any coherent free market philosophy. And there are so many misrepresentations of Greenspan’s actions and Ayn Rand’s philosophy regarding economics in the comments to this article that a response would be fruitless. Long Live Krugman!

  41. mgresser says:

    @kittenfoo: Yep, deregulation sounds all well and good, but at the end of the day, it doesn’t work if we will bail out companies from any mess. Would an insurance company cover a car that won’t pass inspection? Nope. So why would we do the same for businesses with billions on the line? Krugman, as he often is, is right.
    [impatientsufferance.com]

  42. HIV 2 Elway says:

    @ThomasD3: Yet we have proof that government regulation doesn’t work daily. For all those who were up in arms about the grounded American Airlines flights, you can thank the bureaucrats at the FAA.

  43. JMH says:

    Posner knows way more about this shit than I do, so I’ll take his word for it.

  44. vision646 says:

    @stinerman: Your right Rand did outright demand capitalism, because it is the best and most successful way to run an economy. But she did not feel that helping people was “a sign of weakness”, however helping someone because society says you should IS weakness. She believed in standing up for your ideas and ideals regardless of how society felt about them.

    I fully believe that capiialism is the best form of economy, that being said I do not believe that bailouts (corporate or otherwise) should ever ocurr. If you fucked your business up that badly, sell it to someone who wants to give it a shot or suck it up and deal with it.

    @savvy9999: Unfortunately for you, you are wrong. Objectivism is compatible with christianity, as well as most major religions. Objectivism simply stated, is that one person should not base their life and/or decisions on another person’s views. What is truely “evil” is following society’s and/or religion’s lead without ever thinking or making decisions for yourself. That is evil, even if done with the “conviction” that it is good.

    Oh and I’m sorry you did not enjoy her books, I myself have found them very entertaining and enlightening. It is nice to have an author show the heroic parts of human life occasionally instead of the constant bashing of the human race. While not everything we as humans do is great, at least some of it is and that part should be talked about too. Nothing good can come of constant negativity.

  45. @SloppyChris: Amen to that. There shouldn’t have been any regulation to deregulate in the first place.

  46. marchhare22 says:

    @tz: Right… a free market is a real good idea eh bud? Leave concepts of freedom and anti-protectionism at the service of vested wealthy interests, allowing them to attack labor laws and other protections of the majority of America? Grab your stooge hat and return to Amaco.

  47. jeff303 says:

    By the way, in case anyone is still reading this and wants to know what “the Rand establishment” has to say about bank bailouts why not read it directly from the source? [www.aynrand.org]

  48. Craysh says:

    I think the banks SHOULD get the bailout.
    Why? Because the “housing crisis” was caused by the Government in the first place.
    President Carter believed that not enough people were able to get a house when they wanted too. He passed a bill requiring a certain amount of “sub-prime” loans for every couple of “prime” loans. Sub-prime loans are high-risk loans.
    So is it any surprise that a lot of those who have received those sub-prime loans are in default?
    If anything, REGULATION is what has caused this slowdown (a 0.6 increase in our economy is not a recession despite how people like samglover like to ignore it). If banks weren’t required to give out bad loans, fewer people may have houses but they’d be more secure in their financial situation.

  49. lihtox says:

    @Big Poppa Pimp: Calling what the federal government did by bailing out Bear Stearns and misguided forms of regulation “deregulation” is completely absurd.

    “Deregulation” to my mind means “removing regulations”, and is only part of a pure-capitalist economy. A bailout isn’t a regulation, it’s a freebie.

  50. lihtox says:

    @vision646: Having experienced the horrendous conditions of the Russian “revolution” and its aftermath, and then what this country offers to all who live her, she favored capitalism.

    This is a false dichotomy, suggesting that the only two possible economic models are Russian communism (truly a horrible system which no one in this country seeks to emulate) and American capitalism. Given the choice between those two, even a left-wing nutter like myself would choose capitalism. But it’s a major reach to go from “capitalism is better than communism” to “capitalism is the best possible system”.