Deregulation: Fact or Fiction?

What caused the economic crisis that we’re in right now? President Obama and the Democrats are pointing to “failed Bush economic policies.” Conservatives seem to be more concerned with how to get out than how we got into the mess. One can’t help but ask the President which policies, exactly, brought our economy into this mess? Or was it something else?

The most likely thing for a liberal to say is that the deregulation of the financial sector coupled with Wall St. greed is what caused the meltdown. But if you ask exactly which bits of legislation or fiscal policy were changed that ‘deregulated’ the financial sector, they won’t be able to answer you truthfully. That is because there really was no major deregulation during the Bush years. The legislation commonly cited is the Gramm-Leach-Bliley Act, passed in 1999. This act reversed Depression-era laws that prohibited banks from consolidating themselves. This is certainly a “deregulation”, but did it help to cause our current economic situation? No. In fact, it has probably helped to mitigate some of the damage. Bill Clinton defended this piece of legislation,

"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”

So if not the Gramm-Leach-Bliley Act, where was the deregulation that supposedly happened in the Bush years? It doesn’t exist. The SEC certainly passed a few decisions that were deregulatory, but about 2/3 of their rulings from 2000-2008 were actually increasing regulations on business. So we can’t look at the Bush years for deregulation… perhaps that was not really the cause.

Indeed, the real cause of the economic meltdown was the collapse of Fannie Mae and Freddie Mac, the countries two mortgage companies. And the cause of the collapse of these two firms is very obvious: regulation. But let’s start a little before this regulatory law was passed. Fannie Mae (FM) and Freddie Mac (FM2), since the 70’s, were under pressure to give mortgages to low income families that probably couldn’t afford the mortgage. Handing out these loans were very high risk and very poor business practice, so FM and FM2 were very resistant to invest. However, in 1992, the bill that ultimately caused this crisis was passed. The Federal Housing Enterprises Financial Safety and Soundness Act created a regulating body for FM and FM2. The general purpose of this body was simple: get housing to low income families by forcing FM and FM2 to invest in high risk mortgages for those families. It sounds like a very noble and good thing to do, but if you want to get housing to poor people, this is not the way to go about doing it. The reason this is bad is because you have FM handing out all these mortgages to people who cannot afford the homes, and thus will very likely not be paying back the loan. So About 15 years later, you see the collapse of Fannie Mae and Freddie Mac, which in turn causes the collapse of our economy.

So when I hear President Obama talking about “failed Bush policies” I wish someone would remind him that Bush’s economic policies didn’t fail. It was actually the policies that he’s advocating: regulation. And Conservatives aren’t being partisan right now. They know economics, and they know that more regulation is not what this economy needs.

As a side note, I don’t agree with the conservatives on making a ton of tax cuts. In a recession, people that receive money from tax cuts will not spend the money. They will save it, and so tax cuts will not produce any stimulus for the economy.