Regulation has not lessened, instead it has harmed us


Last week’s Wichita Eagle featured an op-ed by Brad Beachy, who is co-chairman of Wichita Democracy for America. Several of the claims made by Beachy deserve examination. In particular, Beachy blames free markets as the cause of our current economic problems: “The Great Recession we’re in now started in late 2007, after several years of deep tax cuts and major repeals of government regulation in the financial market.”

Let’s look at regulation. Not everyone agrees with Beachy’s claim of major repeals of regulation in recent years. The liberal Time Magazine wrote this assessment of George W. Bush’s regulatory legacy about a year ago:

The only major piece of regulatory legislation enacted during the Bush years was the Sarbanes-Oxley Act, which dramatically increased regulation of corporate financial disclosures. The really big regulatory changes being pointed to now as possible culprits for the crisis date back to Bush’s predecessors: Bill Clinton, Ronald Reagan, even Jimmy Carter and Gerald Ford. So the popular Democratic refrain that “Bush-era deregulation” is to blame for our troubles is a little hard to square with the evidence. What is true is that most Bush-era financial regulators were less than enthusiastic about the very act of regulating, and that Bush’s “ownership society” push glossed over a lot of potential dangers. Bush didn’t cause the financial regulatory breakdown, but he didn’t jump in to fix it either.

The housing crisis played a large, perhaps dominant role in the current recession. So let’s look at what were the causes of that to see if deregulation played a role.

Last October John A. Allison, chairman and former CEO of BB&T Corporation, the nation’s 10th largest financial-holding company, presented a lecture at the 30th annual Economic Outlook Conference at Century II, produced by the Center for Economic Development and Business Research (CEDBR) at Wichita State University. His lecture, titled “The Financial Crisis: Causes and Possible Cures” provided valuable insight into the causes of the problem we’re in.

Allison said “Only government can make a mistake of this magnitude possible.” Government and its regulators, in this case the Federal Reserve System, the Federal Deposit Insurance Corporation, the housing policymakers Freddie Mac and Fannie Mae, and the Securities and Exchange Commission, were the proximate cause of the problem, and prevented natural market corrective forces to work.

At the Federal Reserve, management of our nations’ money supply is a problem. “The huge level of federal debt we have today would not be practical if the government did not own the monetary system,” Allison said.

FDIC insurance of bank deposits leads people to invest in banks without regard to the risk the banks take. It also made the “pick-a-payment” mortgage possible, where each month a homeowner may owe more than the month before.

Freddie Mac and Fannie Mae exist to promote housing ownership, and they promoted it far above the natural rate of home ownership. Their actions also made the subprime mortgage possible.

The credit rating agencies sanctioned by the SEC — S&P, Moody’s, and Fitch — are given a monopoly over the issuance of ratings, and they failed in their duty.

Before the innovations of Freddie Mac and Fannie Mae, savings and loan banks would originate mortgages locally and then hold them locally. Now, the model is “originate and sell,” Allison said. These government regulations made the mortgage broker origination model viable, and led to huge profits, until the bubble burst.

So when Beachy asks “Why does the unseen hand of the marketplace, in its infinite wisdom, give million-dollar bonuses to the CEOs of mortgage institutions who drive their companies into bankruptcy” we have to answer it’s not the marketplace that did this. It was government policy and regulation, developed over the last few decades, that led to this situation. Our financial system operates in nothing resembling a free market environment.

By the way, Beachy starts his op-ed questioning the motives of those he criticizes, in this case the Americans For Prosperity Foundation: “Billionaire David H. Koch presides on the foundation’s board of directors and has funded the organization with millions of dollars.” If motives are reason for criticism, we ought to note that Beachy — an employee at a government-owned and run institution — has a self-interest in keeping the government spending gravy train flowing.


5 responses to “Regulation has not lessened, instead it has harmed us”

  1. Radical_Centrist

    Fannie Mae was created in 1938, but somehow it’s a primary cause of a housing bubble in 2004.


    You’d think it would have happened years earlier.

    Also, one wonders if the depressions, panics, and recessions which occured about every three to five years starting in 1849 were also a result of too much regulation.

    In 1849.

  2. When Politicians say things like “We tried free markets and they didn’t work” (_______) they really have nothing to base that statement on. Personally I don’t think real free markets, as Adam Smith describes, have ever been given a chance in my lifetime.

  3. Radical_Centrist


    The US tried “free markets” and they worked great–at enriching the rich and driving the poor into abject poverty. Remember the William Jennings Bryan (“Cross of Gold”) at the turn of the century. The proletariate was ready to revolt at the excesses of the Gilded Age.

    By the time The Great Depression hit, FDR not only had to stop the rampant cronyism of the robber barons, he had to fight off a growing and angry socialism among the unemployed and ruined who weren’t going to take it anymore.

    You want to go back to 1910, go to Haiti or Somalia. Because that’s what the US would look like with gov’t regulation and taxation.

  4. Radical_Centrist

    correction: withOUT gov’t intervention and taxation.

  5. phantom

    The bigger problem wasn’t fannie and freddie, that was the way they were designed, to package mortgages they purchased, and sell them to investors, with the implied backing of the govt.
    But, the’ free market’ allowed greedy investment companies to package garbage non-prime loans and sell them as if they were prime loans. The greedy banks, not caring about the mortgages since they wouldn’t own them throughout the payback period, competed with each other to attract homebuyers by outlandish lending standards (which they’d never made if the were going to hold the mortgage) then disguised them like they were prime loans.
    The biggest money was to be made from non-prime homebuyers, who could be charged the higher interest.
    Shady mortgage company brokers did the same.
    Although it was never implied that the govt. would back this risky speculation, due to the magnitude, the govt. had to!
    Beachy is much more on point than the guy trying to cover his and his industry’s butt!
    And yes the ratings agency were part of the scam too. They made alot of money by rating house loans according to traditional defaut rates which of course didn’t apply to the non-traditional lending practices and securitization of the loans.
    As far as bush on de-regulation, he may not have weakened the regulation laws, but he appointed people to head the agencies, who despised the agencies and weakened them from the inside out.

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