Eric Scheie at "Classical Values" points out that the word "deregulation" doesn’t mean what some users of it think it means.  After noting that some consider it an unmitigated evil, it seems that they are making it the scapegoat for many of our economic ills when in fact quite the opposite is true.

I’m no economist, but the problem is that deregulation is being seen in a vacuum, without reference to the bigger picture, and I think the bigger picture was influenced — possibly even dominated — by something worse than regulation.

I refer to the complete absence of any standards. Not long ago, Glenn Reynolds made a nostalgic reference to the stuffy uptightness of old-fashioned bankers:

You know, we may just find that all those "stuffy" and "uptight" traits that old-fashioned bankers used to be mocked for were actually a good thing. . . .

Truer words have never been spoken and I’ve blogged about this before. It used to be that you had to actually qualify for a loan. You had to demonstrate income, creditworthiness, equity in the home, that the downpayment wasn’t borrowed, etc. before the stuffy uptight pinstriped guys would even think about giving you a loan. It was good that they were uptight. The "system" (for lack of a better word) worked.

So, what made these stuffy uptight guys decide they could get away with ditching the old uptight unfair standards that said (among other things) that some people are more worthy of getting loans than others?

The answer, as most of us know, is the government. It wasn’t as if these guys just stripped off their pinstripes and dove into the economic orgy room; they did something that’s really perfectly in character for stuffy uptight guys — they did as they were told. And they were told not to ever under any circumstances do anything that might in any way be interpreted by anyone at ACORN to have so much as a smidgen of an appearance of anything resembling discrimination. (A word denoting pure, unmitigated evil.)

Bad as the loss of banking standards might be, it’s not what I think is the overarching problem.

In my view, the biggest the loss of standards came in the form of the all-encompassing government guarantee. It was a gigantic blank check, and it operated to cover all sins. That no bank could ever be allowed to fail, and every mortgage would be backed by big daddy at FANNIE and FREDDIE meant that there really was no downside to anything, whether deliberate irresponsibility or government-mandated irresponsibility. The taxpayers would be responsible.

This may be many things, and it may of course be profoundly immoral, but to call it "deregulation" or "an excess of the free market" is absurd.

This is the same thing as when Barney Frank blamed the housing crisis on a failure of the free market.  At the time, Republicans wanted to regulate more heavily Fannie Mae and Freddie Mac; two entities that are themselves a demonstration of how non-free-market the mortgage industry is.  Democrats are blaming all the usual suspects and hoping their base isn’t paying attention.

Filed under: DemocratsEconomicsGlobal WarmingPolitics

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