One popular meme is that the financial crisis was caused by deregulation in the banking and financial sectors. Accordingly, suggest the memists, free markets should take the blame and more government regulation is the solution.
When did this deregulation take place? One measure of the degree of regulation is how much the federal government spends to craft and enforce regulations in various sectors: consumer safety, environment, energy, homeland security, and so on. The more the government is regulating, the higher its budget should be; and the less government is regulating, the lower its budget.
Here are the federal government’s budgeted spending numbers for the Finance and Banking sector of the economy (in constant 2000 dollars) from 1960 to 2009:
1960: $190 million
1970: $356 million
1980: $725 million
1990: $1.598 billion
2000: $1.965 billion
2007: $2.065 billion
2008: $2.294 billion
2009: $2.343 billion
Another measure is the number of government personnel employed in crafting and enforcing regulations. The numbers for Finance and Banking:
1960: 2,509
1970: 5,618
1980: 9,524
1990: 15,308
2000: 13,310
2007: 11,637
2008: 12,113
2009: 12,190
Other measures of degree of regulation? Conclusions?
Source: Veronique de Rugy and Melinda Warren, “Regulatory Agency Spending Reaches New Height: An Analysis of the U.S. Budget for Fiscal Years 2008 and 2009” [pdf].
Related: Deregulation? The Federal Register’s size.
What is the US economy? Introduction.
Outstanding point. I would only add that a similar and more outrageous claim is that the financial crisis was a failure of capitalism in general. Thus we see efforts not only to regulate more, but to gradually eliminate the entire concept of private property and economic freedom.
Remember in the 1980’s the United States removed the Incentives of failure by socializing losses through bailing out the banks. By shifting the losses onto the taxpayers allowed the gov. and banks to push massive risk without any consequences. Banks began being rewarded through failure, in a normal functioning capitalist society those banks would have failed in the 1980’s but now they are rewarded for making mistakes. It’s like child education and sports. Everybody is a winner and nobody can lose.
Tell me where in this chart does it show how much was spent on regulating DERIVATIVES? I already know the answer: almost ZERO relative to risks they pose to the entire Universe. CDS’s or “Credit Default Swap’s” should have been called INSURANCE…if they ~were~ called insurance, they would have been regulated under insurance law & banks would not have been able to hide them as they have. It is now estimated that the total exposure of derivatives is estimated at over $700 trillion globally. $700 trillion of UNREGULATED financial weapons of mass destruction which about to blow up the planet. Where’s that in his chart? How bout the article…where in the article do you address the really really HUGE problem with financial non-regulation of derivatives? Your PHD should be an acronym for “Piece of Hot Do-do”, because that’s what is displayed in his analysis. Who you working for? Obviously paid very well by someone on the “don’t-over-regulate-my-derivatives” side of the balance.
Dear FQ:
The question of the post is: Were financial markets de-regulated?
The question you are asking is: Did the government use all that money and manpower well?
That issue of focus aside: There is nothing wrong with CDS and various derivatives. They are wonderful financial tools, as long as the underlying assets they are insuring or derived from are sound. So the question is: Why were so many of those underlying assets, e.g., a huge portion of the mortgage market, so very unsound?
Regarding the post from Fuh Que on derivatives, only one type of derivative failed. Those were the derivatives based on subprime mortgages. Many of those mortgages were worthless and that made the derivatives based on them worthless as well.
Now the question becomes, “Why were those subprime mortgages worthless to begin with?” Well for one thing, the federal government reduced the requirements for mortgages so that more poor people and minorities could buy homes. That meant many people who could not afford mortgages were acquiring them. Here is a link from The New York Times with supporting evidence:
http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html
Fannie Mae and Freddie Mac were given “quotas” of mortgages that had to go to poor people and members of minorities. The quotas were constantly increased. Fannie and Freddie had trouble meeting the quotas, so HUD gave them permission to buy mortgages that were bundled and underwritten by private lenders. They did – to the tune of over $800 billion starting in 2002. That provided a huge stimulus to the subprime loan sector. They went wild trying to fill the increased demand for subprime loans. Here is a supporting link from the Washington Post:
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html
And even when regulators discovered trouble in 2004 (well before the crisis hit) this is what happened to them when they tried to tell Congress that a popular political program was in trouble.
http://www.youtube.com/watch?v=_MGT_cSi7Rs&feature=related
This seems to me to be a strikingly lazy and ignorant post, especially given that it comes from an academic claiming to know something about business.
Your graph showing a ZOMG! scary tsunami of government regulatory spending in finance and banking has a simple and well known explanation: the finance and banking sector has grown at a rate that is equally or even more spectacular..
Hence it is perfectly possible for the industry to be less effectively regulated, while government spending dramatically increases. To demonstrate this I have done some quick, rough graphs that put your figures in context.
First, using Fed data for GDP, I’ve tracked regulatory spending vs finance’s contribution to GDP.
http://www.flickr.com/photos/39984815@N05/6485826693/
At a 1:1 ratio, the regulatory spending increase is actually invisible, (the highest point seems to be the ’60s at about 0.25% of the size of the actual market. ZOMG! Strangled in bureaucracy!)
So I scaled it so the trends are actually visible. What we see indeed fits a deregulatory story, as the finance and banking sector radically climbs and the regulatory spend flatlines or declines.
http://www.flickr.com/photos/39984815@N05/6485954389/
Of course I do not claim these graphs are in any way definitive: I did them in about five minutes. No doubt there will be far better work elsewhere. But clearly the one big story about finance in the last 30 years that explains your data and that any competent commentator should be aware of is entirely absent from your post. Why?
Three quick points, Daniel.
1. Note that in the post I say this is one measure to consider and ask what others we should consider. Why did you overlook that?
2. “De-regulation” means that the trend is to eliminate or lessen the force of regulations. Your comment changes the topic from deregulation to effective regulation. Effective regulation is a worthy issue to discuss, as I mention here. But it is an illegitimate tactic on your part to change the topic in order to make a criticism.
3. On the interesting issue of the relative size of regulation to that which is regulated. Your assumption seems to be that if an activity increases in size or complexity, it needs more regulation. A simpler example to consider: If an increasing number of people are getting married, do we need to increase proportionately the number of regulations on marriage? Or: If there’s an increasing variety of vehicles on the road (cars, motorcycles, trucks, SUVs, etc.), do we need more complex traffic regulations? Maybe, but that’s not obvious. And it is especially not obvious in the case of financial markets, though your comment seems to suggest that it is obvious.
The numbers provided do show a decrease in the people employed from 1990 to 2007, exactly in the time period when supposed deregulation happened (Glass-Steagall: 1998?). It’s not clear if this tells much.
What honest critics of the deregulation/free markets fail to acknowledge is that every time when crisis happen, with deregulation or without, they blame it immediately on lack of regulation. If there is one thing certain, next crisis is just around the corner. We can tell already now what these and other/biased critics will say.
To the Fuh Que point “if they ~were~ called insurance, they would have been regulated under insurance law & banks would not have been able to hide them as they have. ”
Fuh Que is wrong. Federal Reserve audits banks on a regular basis. Does your statement mean that Fed is that incompetent that it cannot catch banks? If this was true, than why none of the transgressors have been fined/punished as a result? A better explanation is Fed knew everything but chose to close its eyes ….
Daniel, you are saying, “Hence it is perfectly possible for the industry to be less effectively regulated, …”
What is your definition of an ideal regulation? Why our best and brightest politicians have not yet devised this ideal regulation once and for all for the happy thereafter?
Coincidentally, just yesterday past executives of Freddie and Fannie got indited on fraud charges. Can you explain:
1. Why all these years your favorite leaders in Congress and Senate that favor and lead regulation have been defending obvious wrongdoings=crimes committed by these executives?
2. Why Freddie and Fannie have been left outside Sarbanes-Oxley?
3. Why your favorite politicians left themselves outside insider trading laws?
…..
n-1. Why your favorite politicians left themselves outside Obamacare and later issued tons of wavers to their friends?
Is this your definition of fairness?
Stephen,
To your 1., my point is precisely that as an informed commentator you shouldn’t even need to ask for a measure such as this. It’s rather like calling for different views as to whether the earth orbits the sun. This is the single most important narrative about the finance and banking industry in the last 30 years, and the obvious frame that explains the apparently shocking figures you’re touting. Yet, strikingly, you fail to inform your readers of this. Once again: why?
To your 2. this is rather pedantic, don’t you think? If the number of nurses remains the same and the number of patients dramatically increases, you will probably have a decline in the effectiveness of the health system.
As for 3., this is also very weak. First, if you increase the number of people getting married you will almost certainly need more priests, marriage celebrants, justices of the peace etc. If the ceremonies people demand are more complex and time consuming, you will probably need to build more churches. And so forth. The “regulatory costs” – and that is the topic of your post – of maintaining the marriage system are very likely to go up. Of course, what we are seeing when we include the missing story in your figures is that regulatory costs are falling in proportion to the growth of the industry; indeed, if the finance industry figures of the past 30 years were for marriage, and the government represented the church, one would quite reasonably conclude that the religious regulation of marriage was in decline!
Daniel:
A. In your first comment you say (nastily) that I didn’t raise the right question. Then in your second comment you say (insultingly) that I shouldn’t have had to raise the question. Does that strike you as coherent? Or as good, civil discussion?
B. Given your tone, I wonder about your motivation for commenting. Do you think insulting, attacking language is helpful in getting people to take your points seriously? Is that how people concerned with the truth advance their understanding socially? Or is your purpose only to vent against those who don’t already agree with you or instantly accept your views on complicated topics? Keep also the context in mind: This is a blog post forum for ongoing discussion, not a finalized peer-reviewed treatise.
C. Supposing you are still with us: Do you at least grant that deregulation, properly defined, is not the culprit? That is the only point of my original post. (The proper definition of concepts such as deregulation is not “pedantic,” and is especially important on complicated issues.) If so, then of course we can move on to other issues, such as the hypothesis that the relative-size-and effectiveness of regulation is the real culprit. Or is your strategy going to be to continue to ignore the original post’s point and insist that only your take on a different (though related) point is the real issue?
D. Absolutely your follow-up considerations are worth raising about increased quantity, quality, and complexity of systems. I like your healthcare/nursing example, so let’s work with that.
Clearly healthcare can increase along a number of dimensions: number of patients, technology, types of procedures, more doctors, nurses, administrators, and so on. All of that increased complexity so far is on the private, non-government side. Next: All of that private-sector increase might mean a need for more government. That needs to be argued and is not obvious.
When it is argued, the distinction between more regulators and more regulations is important: It will be one thing to argue that the government need more people to enforce the existing regulations, and it will be another thing to argue that it will need to make more regulations.
The first is likely to be true, ceteris paribus. The second is controversial. One side of the debate typically argues that increasingly complex social systems need increasingly complex, top-down government regulation to manage them. The other side typically argues that a small, well-chosen, and clear set of rules combined with free and self-responsible agents can and will from the bottom-up generate self-regulating, complex systems.
So that is why I say the relative-size-of-regulation question is worth raising, but its answer is not obvious.
Stephen,
My criticism is, obviously, that your post is highly misleading. Contra what you call the “popular meme” of deregulation, you supply some figures and a graph that show government regulation as measured by costs supposedly going the opposite way – rising dramatically in the years leading to the GFC. You then ask, rhetorically, when deregulation could possibly have taken place.
But a crucial piece of information is missing from your presentation that changes the story entirely: the fact that the financial industry had grown even faster than the government’s spend on regulating it. This fact is a) well known to competent commentators and b) the most obvious explanation for the dramatic growth of regulatory cost your figures show, and c) implies that the financial industry did indeed become less regulated by a standard of measurement that you yourself proposed. Unfortunately this is the opposite of the impression your post sets out to create.
Assuming you’re still with me, can I ask again why this key fact was omitted from your discussion? And to counter any accusations of being misleading, perhaps you might like to update your post with a graph showing the parallel growth of the financial industry with regulatory costs. Here’s one for example:
http://en.wikipedia.org/wiki/Financialisation
It’s very, VERY simple: the straight-forward claim by statists, in the Democratic party is that the financial crisis was caused by a reduction in the regulation of the financial sector during the Bush Administration.
Yet, under any measure one cares to consider, regulation was NOT reduced.
So we change the subject. And I am weary.
Interesting chart. I’d like to see an additional trend chart based on the amount of regulatory dollars spent as a % of GDP and as a % the size of the industry they’re charged with regulating as well.
My sense is the % of a GDP and % of industry trend chart would tell a slightly different story than the story the chart provided appears to tell. But that’s just a hypothesis. I’d love to see the data.
On the employee side, a trend of the # of Finance and Banking regulators expressed as a % of all government regulators would be interesting to see.
Sorry to buck the trend here, but I have no insults or general testiness to unleash at this time.
@william Walsh,
Your claim is seems to be rather obviously wrong. I was able to find exactly such a measure in a matter of minutes – see my original comment. Now I’m happy to have my graphs criticized if I’ve got them wrong – they are quick thimbails i ran in about 5 minutes. But if they are roughly correct then there is indeed a clear measure of declining regulatory spend. Or does that only function as a measure of regulation when it goes in the direction you want it to?
Daniel Barnes, I’ve looked at all of your graphs. It doesn’t appear to me that they indicate any real DECREASE in anything, perhaps (but not clearly) a decrease relative to something else.
Perhaps you might strengthen your argument by pointing to a specific proposed reg that Bush vetoed or failed to implement. Perhaps you might mention regs approved by the Clinton Administration that Bush had overturned or countermanded. A specific Executive Order or Veto Message would make for good reading on this subject.
It is possible that I’m wrong but as one who ran his own financial advisory firm during the Clinton and Bush years, I’m confident that you will not find anything of consequence. And that is not the point is it?
Dr. Hicks’ point is clear: along two important dimensions of measurement — dollars and employees — government’s control over the financial sector DID NOT DECREASE during the Bush years.
Perhaps there is a legitimate claim that regulation should have increased faster than it did or perhaps new products or practices demanded an increase in spend and head count beyond what occurred, BUT THAT IS A SEPARATE question.
The narrative of the political left-wing and its handmaidens in the media, that George W. Bush was a “deregulator” is nonsense. Much went wrong during the Bush years. Indeed, little went right, but the continued hysterical insistence that there was or is too little government intervention in the financial services industry does little to help understand reality. And perhaps do better next time.
William Walsh wrote re:deregulation:
>It is possible that I’m wrong but as one who ran his own financial advisory firm during the Clinton and Bush years, I’m confident that you will not find anything of consequence.
Let me see now. There would be what’s known as the Bear Stearns exemption, which the major banks lobbied the SEC for and finally got in 2004, and which allowed them to lift their net capital leverage ratios from the previous restrictions of 12:1 to 30:1 or more. This major relaxing of restrictions is regarded as a key contributor to the GFC. We also have changes to CFTC rules in 2000, 2004, and 2005 lobbied for by the likes of MF Global that allowed them to use their customers’ money in ever more risky bets. The FCIC report on the crisis includes the government deciding not to regulate the skyrocketing swaps market in 2000. Glass Steagall was repealed a year earlier, allowing too-big-to-fail financial mega mergers to take place. We have the Office of Thrift Supervision which took what the Washington Post described as an “aggressively deregulatory stance” towards the institutions it was supposed to be supervising – the now infamous 2003 photo of the two key government regulators and the three reps of the bank trade associations cutting red tape with chainsaws sums it up.
Shall I go on?
@Doug Jones, see my first comment for just such charts, albeit done very roughly.
Oh, so when the government replaces one rule you retroactively like with another rule that you retroactively dislike, that’s DEREGULATION. Wow! I didn’t know that.
When the government imposes a capital ratio requirement, that is a regulation. When the government changes the regulation to some other capital ratio, that is not an instance of deregulation. Elimination of the capital ratio requirement and requiring consumers of financial services to make decisions regarding the relative leverage of their banking choices and allowing those that choose poorly to suffer the consequences would be an instance of deregulation. Shall I go on?
Your photo is evidence of something although I’m not sure what. Politicians and lobbyists pose behind A FOUR FOOT STACK OF REGULATIONS (apparently) THAT NO ONE ON THE PLANET HAS READ AND YET PEOPLE IN BUSINESS HAVE TO KNOW BY HEART OR END UP IN JAIL. This is evidence of an reductions in regulations? Is that your claim? Or is it an instance of government making promises to the rent seeking class of political favorites? Although if the regs are four feet tall perhaps cutting them down to size would have been a good outcome.
And then we have the spectacle of the Washington Post and the FDIC, those organs of the right wing, liberty conspiracy, as arbiter of what constitutes deregulation. The FDIC for Christ’s sake! Puleez. Next thing you know the FDIC, FMCSA and FDA will be outbidding each other to sponsor one of Dr. Hicks’ seminars.
Regulation means RULES, not rules you like, which, we gather, would include lining up everyone who works at a bank and shooting them in the head.
One of the problems with arguing with statists is that they tend to operate on the premise that the world we live in is history’s fullest expression of free market capitalism instead of the world they always wanted.
And forgive me, Dear Readers, for taking this discussion further off track. Dr. Hicks’ claim remains: Federal financial services regulatory spending and headcount increased during the Bush years. Contrary to the narrative of the hysterical left wing, George Bush was not a deregulator.
Oh if he had been.
In response to these straight-forward, objective claims we are confronted with a hodge-podge of Bush hatred inspired non sequitur. Bush did not deregulate the financial services sector. Why then did the financial crises occur. A much more interesting question that we will never get to with all of the screaming in the room.
It is interesting that the Obama Administration has hand fed this narrative to its supporters in order to cover for its own epic mismanagement of the economy and that regulatory apparatus. And they buy it! And the West crumbles.
William:
>Oh, so when the government replaces one rule you retroactively like with another rule that you retroactively dislike, that’s DEREGULATION. Wow! I didn’t know that.
As I typed that comment I did wonder whether someone might be stupid enough to say, “oh, the banks successfully lobbied to change the 1:12 ratio rule with a 1:40 ratio rule, sure, but that’s is still a regulation, so it doesn’t count!”. But then I thought that nobody could possibly be that stupid. I was wrong!…;-)
Unsupported (and likely false) premises: regulation is always good, the harsher the better; regulations I like are objectively better than regulations I dislike; regulations I like never result in negative unintended consequences; regulations I dislike always result from nefarious impulses of the greedy 1% and ALWAY result in negative, unintended consequences.
A corollary: I get to make up the rules of the debate and alter the definitions of its terms upon my subjective whim before, during and even after the debate.
“I was wrong.” On that we are in full agreement.
A lot of times “deregulation” is not actually free-market mechanics at all but a newly-negotiated deal between industry and government power-brokers whereby (some) industry is favored in a way it previously wasn’t, but it could actually be handouts or turning a blind-eye to shoddy business practices rather than allowing companies the freedom to operate. one problem is that way too many people seem to take a mystical (i.e. black box) approach to understanding business and the market. The second problem is that it’s very difficult for people to conceive of a system operating efficiently without centralized control or compensation and “tweaking”.
Michael, thank you for stating clearly what I was trying to say.
Deregulation means “getting the government out.”
Virtually all regulation is written by lobbyists anyway.
The concrete-bound, Pragmatist opposition to putting facts in context is the problem. Statists consider only the narrowest, most immediate, govt control (or lack of control) of banking, as if the wider, long-lasting, fundamental controls dont exist or are beyond criticism. Money has been socialist since, at least, the 1914 Fed founding. Banking has been virtually socialist since that time. Variations within this are basically irrelevant, despite hysterical Pragmatists intellectually paralyzed by this moment’s concrete crisis and this moment’s concrete solution. And see Richard Salsman’s _Breaking The Banks_ and _History of Money & Banking in the US_ by Murray Rothbard for long-range views. Capitalist productivity has been stronger in the long run than the govt attack on production but this may be ending.
See Mises’ _Human Action_ on why statistics are valid for economic history but not economics. Coincidences are not causes. Man has free will.
Trash the Fed and its counterfeiting of money and bank accounts. Free the banks. Commodity money. End fractional reserve counterfeiting (which encourages govts to counterfeit). Tar and feather Bernanke and Krugman.
Man’s mind, not a bureaucrat’s gun, is the source of production. See _Atlas Shrugged_.