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)

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