Very good article by Dean Baker on the Boston Review (January / February 2009). Extracts (my emphasis):
"The extraordinary financial collapse of recent months has been commonly described as a testament to the failure of deregulation. The events are indeed testament to a failure - a failure of public policy.
Blaming deregulation is misleading.
...Framing regulation debates in terms of more and less is not only inaccurate; it hugely biases the argument toward conservative positions by characterizing an extremely intrusive structure of, for example, patent and copyright rules, as the free market. In the realm of insurance and finance over the last two decades, calls for deregulation have been cover for rules tilted starkly toward corporate interests. And the recent change in bankruptcy law, hailed by conservatives, requires much greater government involvement in the economy.
False ideological claims have circumscribed the public debate over regulation and blinded us to the wide range of choices we can make. Without these claims, what would guide regulatory policy? What kinds of choices would we have?
(...) To be fair, rarely does either side argue against regulation as such. The real issue is the structure of regulation and its impact on economic outcomes, especially income distribution.
Let's return to the financial crisis with this in mind. In the decades preceding the financial collapse, regulations designed to protect the public and to ensure the stability of the financial system were considerably weakened, but the system was (and is) quite far from being deregulated.
The key regulation that remained in place was the "too-big-to-fail" doctrine. Essentially, the banks and other financial institutions took enormous risks with an implicit guarantee that their creditors could count on the protection of the US government if things went badly. For everyone except the creditors of Lehman Brothers and the preferred shareholders of Fannie Mae and Freddie Mac, this gamble proved correct.
This one-sided giveaway was not deregulation. Had those setting financial policy over the last three decades been committed to deregulation, they would have assured financial markets that financial institutions making bad investments would go out of business and that their creditors would be out of luck. The Federal Reserve Board and the Treasury would have warned that investors were acting at their own risk when they put money in Bear Stearns, AIG, and the rest.
In the context of a too-big-to-fail principle, the removal of restrictions on leverage (investment banks were allowed to leverage their capital at a ratio of forty-to-one compared to just ten-to-one for commercial banks) and the relaxation of other prudential regulation (the nominal value of credit default swaps, a new class of derivative instruments, grew to more than $70 trillion in a nearly unregulated market) essentially gave the banks a license to wager with taxpayers' money.
Banks did exactly what economic theory predicts. They took huge risks, leveraging themselves to the hilt with questionable assets, knowing that they would gain as long as the housing bubble held up. And the banks did so with willing accomplices among pension funds, hedge funds, and other investors because these investors knew that the government would rescue them if things went badly. Deregulation can be a principled position held by true believers in a free market. But Wall Streeters all wanted one-sided regulation that provided them with an enormous government security blanket without any costs or conditions. ...
If the real debate is over the type rather than extent of regulation, then why is it always framed as the latter? ...
...most liberals still accept the proposition that the distribution of income is fundamentally determined by the market rather than political decisions embodied in regulations such as patents, copyrights, and bankruptcy law.
But what if we accept a view that virtually every facet of the economy is shaped by policies that could easily be altered? Investment bankers get incredibly rich because the government gives them the shelter of too-big-to-fail but doesn't impose any serious prudential regulation in return. Bill Gates gets incredibly rich because, through copyright and patents, the government gives him a monopoly on the operating system that is (or was) used by ninety percent of the computers in the world.
Doctors are well-paid because, unlike less politically connected workers, they enjoy protection from international competition. The same is true for lawyers and other highly paid professionals. The six-figure salaries depend less on skill and hard work than on being able to structure labor markets in ways that autoworkers, textile workers, and cab drivers cannot.
Deregulation can be a principled position held by true believers in a free market. But Wall Streeters all wanted one-sided regulation that provided them with an enormous government security blanket.
(...) The less-versus-more framing of regulation supports the premise that there is in principle an unregulated market out there and that some of us wish to rein in this unregulated market while others would leave it alone. This is consistent with the idea that large inequalities in income distribution just happen as a result of market forces. But as the above examples illustrate, no one is really talking about an unregulated market - rather we are all just talking about whom the regulation is designed to benefit. Distribution of income has never preceded the intervention of government.
The government is always present, steering the benefits in different directions depending on who is in charge. ... Liberals, too, are invested in the obfuscation that less-versus-more provides.
Even so, the catastrophe produced by the one-sided deregulation of the financial industry, coupled with a long list of regulatory failures in other areas, will almost certainly lead to a serious rethinking of regulatory policy in the years ahead. It remains to be seen whether this rethinking will go beyond the familiar debate. We know that when we emerge from the current crisis the economy will be extensively regulated. The questions is, to whose benefit?
... Read all here
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Protect Your ASSets: Buy Gold or Silver NOW - If you wait you will be late.
(He who panics first, just may salvage something.