Monday, September 20, 2010

Regulation Did not Cause the 2008 Crash

Memory is a funny thing.  We tend to remember things that support our world view.  Contrary facts tend to fade away.  Faulty memory may be a defense mechanism against cognitive dissonance, but I'll leave that to the psychologists.

How soon we forget.  I understand why Republican politicians and conservative talking heads maintain that bad government caused the 2008 crash: their entire livelihood depends on attacking government as "the problem."  It's a bit surprising, but only a bit, that they would run this year on rolling back the anemic Obama financial regulations.  But it's almost beyond belief that large swaths of the population buy this.  Almost.

We need little bit of history.  After the Civil War, the United States faced a series of bank panics.  Roughly every five or ten years (sometimes more frequently, sometimes less), the financial system would falter due to greed and corruption, creating mass panic.  People would rush to get their money out of banks, the banks would collapse and the economy would nosedive.

This series of boom and bust continued for about 70 years and culminated in the Great Depression.  Things were so bad that the Roosevelt administration put into place a series of financial industry regulations to ensure (and insure) that something of that magnitude would never happen again.  These depression-era regulations led to a "quiet period" lasting fifty years.  During that time, America experienced its greatest period of sustained growth.

In the 1980s, however, the Reagan administration and Congress repealed the depression-era regulations on the savings-and-loan sector.  At the time, the S&Ls needed "innovation," not "regulation."  About seven or eight years later, the S&L industry completely collapsed due to greed and mass corruption.

In 1999, the Clinton administration and Congress (Republican Phil Gramm led the charge) repealed depression-era regulations on the banking and investment banking industries.  About seven or eight years later, the banking and investment banking industries completely collapsed due to greed and mass corruption.  I do mean completely.  There are literally no major investment banks.  Even Goldman Sachs transmogrified into a bank-holding company.

Correlation is not causation.  I know this.  But given this compelling timeline, those advocating less regulation should bear an extremely heavy burden.  It seems they don't.  We should collectively laugh at those who maintain the crash was caused by poor people, Barney Frank and a 1970s lending standard.

Hopefully, we'll look back and refresh our memories regarding poor financial regulation before another crash does it for us.

1 comment:

  1. Maybe I'm making it all too simple. Seems pretty clear to me that the lack of regulations created the worst economic crisis in history. Let's make no mistake, that at the core of fewer regulations is the American spirit of greed. After a massive government intervention and a slow turn around, suddenly the Right has reclaimed the stance again that what WE need is less Regulations! No, what THEY need is less regulations so the funders and lobbyists can keep political power. Instead of protection for the separation of church and state, it should be between Big Business and State. I mean how can anyone advocate going down the same path that just led us to a near collapse of the economy?? It's hard to believe that the non-top 2% of income holders on this country would support this type of oppressive class warfare. So not only is there some cognitive dissonance and selective memory at play, but I suggest there is a broader identification with the upper class more similar to Stockholm syndrome. I don't believe in communism. I do believe that the greatest wealth should be held by the greatest number of citizens for a fair and just society. Call me crazy tgat IU dream of a utopia for myself and future generations. Political and social policies are being driven by modern day aristocrats that really have no intention of a true Republican libertarian state, where we all live peacefully without government involvement in our lives. Rather, they want the government in our bedrooms, in our marriages, in our wallets, and occupying other countries -- and claim to be Republican. A true Republican, in the traditional sense not the morally superior Neo-Cons that walks amoung us today, would be outraged at the GOP. They seem to hope for further division and financial gain at the expense of the many. Who would want a world liek that - How can the many just let this happen? It is worth a psychological evaluation.

    ReplyDelete