Deregulation Gone Wild - from Mark Wenzel's New Blog

Mark Wenzel caught my attention with his recent reflections on the intertwined legacies of Ronald Reagan and Alan Greenspan, including the unleashing of "free market fundamentalism", the repeal of Glass-Steagall, and the emergence of the latest loopholes for the rich and powerful to exploit at the yet-to-be-tallied expense of the so-called middle- and lower classes. It is well worth a look, and Wenzel's blog Capital Market Musings worth a bookmark. A snip from Wenzel:

The Credit Bubble, Deregulation Gone Wild and Saving the Financial Industry from Itself, Mark Wenzel, April 4:

West Berlin, Germany. June 12, 1987;
"...if you seek liberalization: Come here to this gate! Mr.
Gorbachev, open this gate! Mr. Gorbachev, tear down this wall!" …

For the role that America and Ronald Reagan played in that, it represented to many a moment that came to symbolize the best of what America had to offer. There's another side though, the economic one and specifically deregulation of the financial industry, where the aftermath of the transformational presidency that was Ronald Reagan hasn't exactly gone as planned. In regards to the current financial crisis described by many as the worst in multiple generations, billionaire investor George Soros stated here;

"The cause of the current troubles dates back to 1980, when U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher came to power, Soros said. It was during this time that borrowing ballooned and regulation of banks and financial markets became less stringent. These leaders, Soros said, believed that markets are self-correcting, meaning that if prices get out of whack, they will eventually revert to historical norms. Instead, this laissez-faire attitude created the current housing bubble, which in turn led to the seizing up of credit markets..."

Soros further opines elsewhere;

"...regulations have been progressively relaxed until they have practically disappeared". …

One of the first targets of financial system deregulation in the Reagan administration was savings banks and commercial banks. …

In less then 7 years after the initiation of this major banking deregulation, in February of 1989, President Bush (the first of course) unveiled the S&L bailout plan. …

In 1998, the stakes are raised, as the financial industry goes for the juggular. Again from Frontline; …

"After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic."

Fresh off of this "victory", incredulously, the man who was charged with being the banking systems chief regulator, Fed Chairman Alan Greenspan continued to lead the charge towards a completely unregulated financial system as he turned his sites towards championing the growth of unregulated derivatives. …

The ensuing years saw the accelerating phenomenon where, with the last major regulatory impediment removed, and more importantly perhaps, not replaced with any form of updated regulation, the credit bubble accelerated, fueled heavily by the explosive growth in unregulated derivatives. #8230;

The result of this is that today we have what is called the $516 trillion shadow banking system, the "secret banking system built on derivatives and untouched by regulation" according to the worlds largest bond fund manager, Bill Gross.

Further, in getting back to the current credit crisis, here we are today, in somewhat of a repeat of the S&L deregulation followed by bailout scenario, in that we have the Glass-Steagall deregulation followed in a similar amount of time by the bailout brigade. This time though, the stakes are much higher. …

Is this what we have reduced our financial system to? Where it is so weak and fragile that the failure of a single investment bank threatens a widespread financial calamity. If so, how did we let it reach this point? In my mind, extremist laissez-faire deregulation surely played a heavy part.

So where do we go from here? By no means am I advocating that we turn back time and reinstall the regulations that previously existed "as is". Further, of course regulation can just as easily go too far (see India here). Free markets are constantly evolving and innovating. Rather then always turning to deregulate though, perhaps its time to work more towards liberalization & modernization but not to the point of removing the systems of checks and balances that helped to make America the great economic power that it is. …

Go read the rest!

HT: Seeking Alpha