Tales From the Drip: Liberal Myths About De-Regulation

As appeared on Politics and Critical Thinking:


Most of the blame placed on de-regulation, by the Left, for the current economic crisis is simply a misleading account of the causes. This is as unreasonable as the Right calling Liberals, socialists. While heaping the blame on de-regulation in this environment of witch hunting is the trendy political motivation du jour, it is quite incorrect. Both sides in this mess were looking for a boogey man, for the Right it was the CRA and for the Left it was Gramm-Leach-Bliley.

De-regulation of the financial sector predisposes people to thinking that all of the rules were gone and Wall Street was running amuck in an orgy of economic freedom. Nutz! Regulatory expansions were never abandoned, nor were any of the rules discarded. It is a misnomer to assume otherwise.

Since the beginnings of the Bush administration, there has been little attempt at actual de-regulation of the financial sectors. From the Heritage Foundation.
In terms of rulemaking--the promulgation of specific rules by regulatory agencies--the Securities and Exchange Commission (SEC) is by far the most active among agencies in the financial realm. Based on data from the Government Accountability Office, the SEC completed 23 proceedings since the beginning of the Bush Administration that resulted in a substantive and major change (defined as an economic effect of $100 million or more) in regulatory burdens. Of those, only eight--about a third--lessened burdens.

The Federal Reserve reports five major rulemakings in the database since
1996--four of which were deregulatory. The only rule change reported by the Federal Deposit Insurance Corporation and the Controller of the Currency is the 1997 adoption of new capital reserve standards, an action with mixed consequences.
As far as Gramm-Leach-Bliley, is concerned the major banks and holding companies that have collapsed were actually unaffected by the actual legislation. From AEI.
None of the investment banks that got into financial trouble, specifically Bear Stearns, Merrill Lynch, Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc., were affiliated with commercial banks, and none were affected in any way by the repeal of Glass-Steagall.
But, the CRA amendments in Gramm-Bliley, was motivation for smaller banks and thrifts, mortgage underwriters, etc. to start a major issuance of sub prime loans, circumventing credit standards set up by the industry. These were purchased in package deals called Residential Mortgage Backed Securities by these major institutions. When people defaulted on them these companies, who so kindly bought them (Sarcasm intended.), were left with enormous amounts of debt without the liquid capital to back that debt up. Sucked to be them.

Concerning the repeal of Glass-Steagall, actually might be favorable to correcting the economic crisis.
AEI-The repeal of portions of the Glass-Steagall Act in 1999--often cited by people who know nothing about that law--has no relevance whatsoever to the financial crisis, with one major exception: it permitted banks to be affiliated with firms that underwrite securities, and thus allowed Bank of America Corp. to acquire Merrill Lynch & Co. and JPMorgan Chase & Co. to buy Bear Stearns Cos. Both transactions saved the government the costs of a rescue and spared the market substantial additional turmoil.
Heritage-In fact, President Bill Clinton--who signed the reform bill into law--defended the legislation in a recent interview, saying, "I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."
Only a fool would think that tyrannical regulation or free market anarchy are the proper approaches to the economy and its problems. Regrettably with the witch hunt mentality and it being an election year an enemy is needed. As time goes on and more peer review studies are released the truth is sure to come out. Until then we will probably have to endure crushing laws and acts seeking to undermine the free market even further, more than likely bringing on more financial problems in the future. It's gonna' be a Liberal Wonder Land!!


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