Wednesday, October 22, 2008

Deregulation didn't cause the financial crisis

Democrats, and the Democrat-friendly press, have been very eager to blame the financial crisis on deregulation. However, Wharton Business School finance professor Jack Guttentag says deregulation didn't cause the financial crisis.
Deregulation, meaning the scrapping of existing regulations, was not a factor in the crisis. The only significant financial deregulation in the past three decades applied to commercial banks. Restrictions on where they could have branches and on their involvement in investment banking were both removed. Most economists, including me, believe that these actions made the banks stronger than they would have been otherwise.

Regulation in itself is a weak defense against financial crises. One major reason is that it tends to look backward, similar to generals fighting the last war. ...

Regulators have no better foresight than do the firms they regulate. Both use statistical models based on experience. A change in the underlying structure of the economy can make such history irrelevant, which is exactly what has happened. Nobody anticipated the severity of the current crisis because, relative to the past, it is off the chart. ...

Can we prevent this sort of problem from happening again? Yes, but the next crisis will almost certainly be different.
Remember that the next time you see CNN blaming Phil Gramm for this mess, without any hard evidence. I dislike Phil Gramm, but he is not responsible for the current troubles.

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