Regulation and the Credit Crunch

One of the issues that came up during the campaign is the issue of regulation versus de-regulation. Many Democrats make the claim the deregulation of the financial system was the cause of the credit crunch. It is true that the actions taken after the S&L crisis resulted in a shift of mortgage origination from regulated banks to unregulated mortgage brokers and the Federal Reserve, which was given authority to regulate mortgage lending, never proposed rules for mortgage lending until we were deep in the crisis.

However, that does not explain why Wachovia and Washington Mutual failed, or why Bear Stearns was taken over with government and why Lehman Brothers filed for bankruptcy. The two banks were clearly watched over by Federal regulators and while Wachovia did have investment bank assets, it was the commercial bank activities that resulted in its demise. The two investment brokers were never closely regulated so you can't blame "deregulation" for their demise. They were always assumed to be open for failure.

The sour fact is that no amount of regulation would prevent the kind of credit crisis. Regulators are drawn from the same industry that they regulate and they gain no superhero powers when they start to work for the government. Regulators, when they are doing their job, can prevent an industry from failing in obvious ways but will never be able to stop a company from failing in non-obvious ways. Governments can not legislate away the greed and stupidity that results in market bubbles. They can close certain routes to disaster but fools will always find new ways to lose their money.

Libertarians not opposed regulations. The only way markets will be efficient is if there are enforced rules promoting transparency, equal access and fairness. This is precisely why governments were created in the first place. However, any regulations seeking certain price levels or granting special rights to certain buyers or seller should be opposed. But Libertarians know there are limits to government powers; that buyers and seller must take responsibility for the transactions they engage in.

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