LIBOR Ought to Nail Deregulation's Coffin Shut

If our world were ruled by rational, informed decisions, the LIBOR scandal would serve as the final nail that would forever end the plague of deregulation fervor and the pestilence of laissez-faire myopia. It won't be. Most true believers will never give up that push towards more and more laissez-faire, no matter how clearly it's shown to destabilize our systems of commerce. Wave ream after ream of documented business and finance train-wrecks under their under their noses and it they'll be unconvinced. They'll still rant and rave that we need less govt just as they've been doing for decades.

"In the early 1990s, the Fed suspended its surveillance of primary dealers, another example of Alan Greenspan's laissez-faire approach to regulation. Since then, there has been "failure after failure" among their ranks, Kotok notes, citing Lehman Brothers, Bear Stearns, Merrill Lynch, MF Global, Countrywide, and now Barclays."
- Aaron Task in "Why the LIBOR Scandal Matters: ‘Destruction of Confidence to the Nth Degree’"

Even now in the wake of LIBOR, candidate Romney's "Day One, Job One" summary lists elimination of regulations as one of the five executive orders he wants to carry out on day one of a Romney term.

Our markets have proven time and again that we need a mix of market choices with government oversight. The ideal balance may vary from market to market, but in any significant market -- one on which much of the economy depends -- we need stabilizers to improve predictability of returns on investment. And we need oversight in order to not only protect the consumer but to protect the honest businessman from dishonest competitors. In an arena of sensible regulation, the honest businessman can proudly say "my company holds to good business practices and I proudly work with government regulators to confirm that to the public." And he can rest more soundly at night knowing that his competitors won't undercut his otherwise stable business with shady, risky moves that a long-term outlook would abhor. Or at least that they'll have significant risk of being caught and called out if they do. And that businessman's potential investors can better expect a reliable, predictable return year after year rather than a sudden flop into insolvency from cutting corners. Business thrives under sensible regulation that keeps it lined up with good business practices.

Yet this is a truth that runs contrary to laissez-faire dogma. And we can not expect them to give up their notions. The best we can hope for is that maybe these scandals might help to show enough of the public that deregulationists hold to a debunked economic faith and that their doctrines should be no less a subject of mockery than Branch Davidians or Flat Earthers.

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.)