Deregulation, Bubbles, And The Myth That Our Two Major Parties Are The Same

Many people point the blame for our recent financial crisis towards deregulation. While there's something to that, deregulation did not cause the housing bubble to exist. All deregulation did was let it get more out of hand and have bigger consequences. While that's plenty of reason to push for strong financial regulations, we shouldn't let ourselves believe that regulations could have prevented there from being any more bubbles. Bubbles can happen without any govt interference. And they can happen despite the wisest govt efforts to prevent them. Psychology, markets, information failures, and irrational exuberance build bubbles. And those are also the factors that usually burst them.

Bubbles can form simply from too few people remembering the last time something happened ... such as a major drop in real estate prices. Then people may -- as they did -- start to think it can only go up and they need to get in now and if they get in now they can easily sell higher later. As long as people start to believe that about anything -- and I knew many people who believed that about housing -- then we will get a bubble.

That said, deregulation did arguably make the housing bubble bigger and played a part in how it popped, the impact, and the aftermath. It would have happened anyway, but it wouldn't necessarily have happened the same. It probably wouldn't have been as bad if we'd had better regulation of sub-prime mortgages, securitization, and derivatives as well as better established procedures for the orderly liquidation of large failed banks in a way that protects their customers but not the banks themselves.

Many have rightly pointed out that the Republicans championed deregulation. In response, some try to claim, "but the Democrats did some too," as if all were equal and as if it were a bipartisan failure.

Did the Democrats occasionally go along with some of those policies? Sure, at least many of their blue dogs did. But the Democrats didn't make those policies central to their platform. They didn't push that recent Republican recipe as the right answer for every situation. By contrast, the Republicans did fully, enthusiastically, thoroughly embrace and push all those bad ideas (see below). Some of the Democrats occasionally went along with the insanity and maybe some even bought parts of it -- which was bad -- but it shouldn't earn their party as much blame as the folks who were seriously pushing all those bad ideas as a central and widespread basis of their party policy.

And worst of all, the Republicans are still pushing deregulation as if it hadn't seriously messed us up in recent memory. The party used to be able to claim a proud history with folks like Ike and Lincoln. Now? They would benefit greatly from an effort to transform themselves away from all they've become. It could be back towards the Grand Old Party they used to be. Or it could be something entirely new. Just please, Republicans, get your party to stop pushing every insane position that's been demonstrated to be wrong and bad for us by recent history.

For more of the "bad ideas" referenced above, see "Republicans undiscover fire" by Mark Sumner.


Full disclosure: I'm an independent, a member of no political party. (And I'm well aware both major parties have their own flaws. ...but that doesn't make their flaws equal.)