Thursday, April 29, 2010

Busting the Bank Deregulation Myth

The Democrats claim the Republican's caused the financial crisis by deregulating banking rules. But DID they? Not according to the facts:

We Didn’t Deregulate
[...] The great villain in the deregulation myth is the Gramm-Leach-Bliley Act, signed into law by Bill Clinton in 1999, which repealed some restrictions of the Depression-era Glass-Steagall Act, namely those preventing bank holding companies from owning other kinds of financial firms. Critics charge that Gramm-Leach-Bliley broke down the walls between banks and other kinds of financial institutions, thereby allowing enormous systemic risk to percolate through the financial world. This critique is the keystone of the “blame deregulation” case, but it doesn’t hold up: While Gramm-Leach-Bliley did facilitate a number of mergers and the general consolidation of the financial-services industry, it did not eliminate restrictions on traditional depository banks’ securities activities. In any case, it was investment banks, such as Lehman Brothers, that were at the center of the crisis, and they would have been able to make the same bad investments if Gramm-Leach-Bliley had never been passed.

Another common claim, that credit-default swaps and other derivatives left unregulated by the Commodity Futures Modernization Act of 2000 were a cause of the financial crisis, doesn’t stand up to scrutiny, either. Research by Houman Shadab of the Mercatus Center has shown that this argument is undermined by its failure to distinguish between credit-default swaps, which are simply insurance against loan defaults, and the actual bad loans and mortgage-backed securities at the root of the crisis. Stricter regulation of credit-default swaps wasn’t going to make those subprime mortgages any less likely to go bad.

And it’s not as though our regulators have been hamstrung by a lack of resources. Government budget figures show that inflation-adjusted spending on finance-and-banking regulation has gone up significantly over the last 50 years, from $190 million in 1960 to $2.3 billion in fiscal 2010. Total real expenditures for finance-and-banking regulation rose 45.5 percent from 1990 to 2010, with a 20 percent increase in the last ten years. That spending rose by 26 percent during the Bush years, and by 7.1 percent in 2009. While these data do not say anything about the regulators’ effectiveness, it is reasonable to assume that a dramatic increase in their budgets is not a sign of radical deregulation.

To be sure, there has been a great deal of deregulation in some sectors of our economy over the last 30 years or so — the airlines, telecom, and trucking, just to name a few — but practically none of it has been in the financial sector or has had anything to do with the current crisis. Which is to say, the Obama administration’s regulatory proposals rest on imaginary foundations. And while the president’s populist criticism of greedy executives and unbridled capitalism may make for good headlines, it has nothing to do with the actual problem. This was that the FDIC, the Treasury Department, and the Federal Reserve created a housing bubble by encouraging a decade of careless lending. When the federal government guarantees bank loans or assets, banks have a weaker incentive to evaluate loan applicants thoroughly, and a stronger one to engage in risky behavior. When things are good, they make high profits; in the case of a catastrophic downturn, it is the taxpayers, not the banks, who foot the bill.

The financial-reform legislation currently under consideration in Congress does nothing to address the Fed’s cheap-money policy or the unsustainable subsidies that government still provides to homeowners and mortgage lenders — the main causes of the housing bubble. Instead, our would-be reformers assume that increased federal control of the economy, the appointment of a new federal czar with the power to curtail the pay of executives in businesses the government now controls, or the creation of a Bureau of Consumer Protection (the zombie version of Senator Dodd’s Consumer Financial Protection Agency) will set things right. The proposed regulations don’t attack the problem of excessive leverage. They don’t reform Fannie Mae and Freddie Mac. They don’t guarantee that taxpayers won’t have to pay for the future errors of bank executives who, cheered on by their government enablers, take on excessive risk. The “reformers” simply wish away the root causes of this crisis: the “too big to fail” mentality and crony capitalism.

Crony capitalism means that not everybody plays by the same rules. Allowing financial institutions such as Freddie Mac, Fannie Mae, and investment banks to maintain significantly smaller capital reserves than commercial banks, while implicitly guaranteeing their obligations, was a critical part of the financial problem. [...]

Read the whole thing. The REAL problems are not being addressed.

As I've noted before, the Republicans did try to reform Fannie Mae and Freddie Mac, but were blocked by the Democrats:

Our Democrat-Created Crisis: They blocked a Reform bill co-sponsored by John McCain

See the video at the link. The Democrats accuse the Republicans of racism for trying to reform Fannie and Freddie. The Democrats prevented reform, and continued to push loans to people who were not qualified to have them.

Bad loans and lending practices were at the heart of the financial crisis. If the Republican's are guilty of anything, it's allowing and enabling the Democrats to create this crisis, and then orchestrate it to advance their Big Government agenda.

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