Question/Comment: Can the recent market fallout be traced back to Reagan’s deregulation of these types of institutions? Is it also a reflection of a Republican/Bush White house that has purposely discouraged regulators from doing their jobs?
Paul Solman:“Deregulation” as a modern trend got its first impetus during the Carter Administration. Remember Alfred Kahn and the airlines, for instance. (Go to this report if you don’t.) But in a larger sense, what has been termed “free-market fundamentalism” certainly made its greatest strides under Presidents Reagan and George W. Bush. And as I write in another question with regard to derivatives and Senator Phil Gramm, Republicans – deeply believing in the efficiency of markets as against the red tape of bureaucracy – have pushed deregulation hardest and longest.
But as a friend pointed out this morning, it’s not so much whether you regulate or not. It’s WHO regulates, and how. The S&L crisis of the ’80s was not caused by lack of regulation: banks were ENCOURAGED to make riskier loans so they could compete with the new money market accounts of that era. Fannie and Freddie weren’t unregulated. They were, it seems, POORLY regulated.
Of course there’s something tautological about this. If things turn out disastrously, they must have been poorly regulated, right? But even so, “deregulation” may be better understood as “regulation” by people who didn’t understand, or worry about, what might go wrong.