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No, Deregulation Did Not Cause the Recession


In the wake of the financial crisis and the subsequent recession, many have tried to pin the blame on the boogieman of Deregulation as the cause. Now I've explained many times before why this is wrong because the boom-bust cycle is caused by the manipulation of money and credit by the Federal Reserve. Here I will show why deregulation was not the cause for other reasons.

The problem with the notion that deregulation caused the recession is that it assumes that the state is capable of figuring out what exactly to regulate. This assumption lacks support because there is no evidence that anyone in the government knew that a recession was even going to happen. Where are all the reports by government agencies claiming that a bust is sure to come and that, due to lack of proper regulatory power, they were powerless to stop it? How can government regulators prevent a recession they couldn't see coming? It's easy now to look back and claim if they had prohibited derivatives or prohibited the kinds of bank mergers allowed by the partial repeal of Glass-Steagal that everything would have been fine, but where were the people claiming this would be a problem ten years ago?

I cannot stress this enough. Not only were they blind to the coming recession, but they were adamantly positive in their outlook. The Treasury Secretary in March of 2008 said that "Our banks are strong. They're going to be strong for many, many years." The Chairman of the Federal Reserve said in May, 2007 that “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Even mere weeks before the collapse both these men assured us that the economy was sound and that maybe Fannie and Freddie might need a little help, but otherwise, the fundamentals were sound. These are the top regulators of the financial and banking systems. Bernanke was named Time Man of the Year and re-appointed by Barack Obama, yet he failed to see or prevent the collapse.

To me it seems the height of naivete to think that these regulators, given more power, could have prevented anything--they didn't think anything was wrong! How could they know which regulations were needed when they never saw what the problems were?

One more thing. When I said that no one in the government knew that a recession was coming I was wrong. There was one man who knew and his name is Ron Paul. From September 6, 2001:


beatrice 5 years, 9 months ago

Derivative mortgage bonds, anyone?

It isn't the deregulation itself, it is those who took advantage of the room provided by the deregulation that caused the collapse of our economy.

beatrice 5 years, 9 months ago

They didn't fix it because the monied broker / puppet masters wouldn't allow it.

Now that we know what can happen, it is foolhardy not to put regulations in place to prevent it from happening again.

Controls did NOT cause the collapse, but the lack of controls did.

JackMcKee 5 years, 9 months ago


"Some years after his monster laid waste to the town, Dr. Frankenstein apparently has reconsidered the wisdom of his creation and has determined it wasn't such a good thing after all.

That's one way to view the conversion of former Citigroup (ticker: C) chief executive Sandy Weill to the counter-reformation sweeping the financial industry calling for the reinstatement of the Glass-Steagall Act. The irony is rich, almost as rich as Weill himself. After all, it was he who swung the wrecking ball to the Depression-era measure that separated commercial banking from investment banking and insurance."


camper 5 years, 9 months ago

Deregulation did not cause the problem. It was a problem of interpreting existing laws. In my mind, the SEC should have looked more closely at these new financial instruments that bundled these toxic loans, derivatives, and credit default swaps. They either looked the other way, or decided to do nothing about it..because times were good. SEC totally dropped the ball, and I have no confidence in them. Add to that the Federal Reserve.

If anyone is interested, watch a movie called the "Inside Job". OK, it is a little like a Michael Moore doc (without the gimmicks), but let me tell you it is telling.

"Truth has few words, lies have many". Leo Tolstoy

camper 5 years, 9 months ago

Liberty, I think I agree with your analysis but don't know enough about the Austrian school. I have personally witnessed the amount of stress the SEC has caused upon colleagues and the long time period of presenting financial statements. We are talking honest people. I have to admit, I am resentful that they did not have there sights on more immediate problems that have impacted the global economy. In my mind, the SEC lost sight of the big picture, and focused on the small guy. I will add below....

camper 5 years, 9 months ago

I am a strong adherent to regulation, but I believe regualtion must be:

1) Simple and not disguised by lawyer and Accountant speak. 2) Any new regulation, should take others off the book. Replace the old.

Regulation is necessary to prevent the few from taking advantsage and expoiting the better whole. But you have to make regulation simple and easy to follow.

camper 5 years, 9 months ago

Yes, punishment with losses is the best regulation. But in the case of 2008, that punishment would have impacted most every American and the world economy......which it did even with the bailout. I also think the banking industry crossed the ethics line. Better laws should have been in place, and the SEC should have enforced existing regulations.

jhawkinsf 5 years, 9 months ago

All it takes is a couple of clever guys to defeat any regulation you can write. You can write 'til the cows come home, but loopholes will be found.

pace 5 years, 9 months ago

So your belief is all law and rule is for naught, let it go man, you are impotent and there are no use of legal tools or use of social and economic rules, or even to fight evil, or wrong. cool. Must help you slide on many issues. Being civilized and fond of law, I say. regulate the moneylenders.

jhawkinsf 5 years, 9 months ago

I didn't mean to suggest that we shouldn't try to regulate. Just be aware that loopholes will be found as quickly as previous loopholes are closed. It's just the nature of the beast.

JohnBrown 5 years, 9 months ago

Your analysis asks all the wrong questions.

With hindsight, it's obvious that the politicians who created Glass-Steagal knew EXACTLY what to regulate: Keep Wall Street gamblers away from Main Street banks. Indeed, the politics that removed Glass-Steagal was the legacy of Reagan, the father of modern-day deregulation.

Anyway, NOW we know what to regulate: return Glass-Steagal.

In other words, your claim is false.

Brian Laird 5 years, 9 months ago

I wonder what actual Austrian economists actually think about all of this. By this I mean economists in Austria, not adherents to a small group of economists who happen to be from Austria. Given that the Austrian economy is a social market economy that has little connection to the so-called Austrian School, I would imagine that the vast majority of actual Austrian economists would not be too happy about what is bandied about in their name.

jafs 5 years, 9 months ago

Causes of these sorts of problems are complex, and not easily solved with simplistic thinking.

Certainly "deregulation" alone didn't create all of the problems, but the lack of adequate regulation, adequately enforced, was part of the problem here.

The idea that nobody knew that unregulated credit default swaps, etc. were risky is just not true.

Fraud and greed were also part of the problem, of course, both on the part of mortgage brokers and consumers, as well as banks.

Certainly easy money can be part of a "boom and bust" cycle, and again, many people are/were aware of that. That's why when times are good, the Fed increases rates, to slow the economy and vice-versa - the whole point of that intervention is to tame those cycles, not create them.

ThePilgrim 5 years, 9 months ago

What blows me away are the Reverse Mortgage ads relentlessly playing on TV. The Reverse Mortgage allows seniors to borrow against their home equity, stop paying mortgage payments. Then when they die or go into the nursing home their kids get stuck with the house and the interest that has accumulated since they did the Reverse Mortgage. And if the market went down then they get stuck with the difference. Irresponsible, but not surprising since most new seniors do not have enough in savings, IRA/401K, and few have pensions any more.

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