Thursday, October 2, 2008

Deregulation as the Cause of the Liquidity Crisis?

I keep reading, in well over a dozen different articles now, that deregulation was one of the primary causes of the current credit crisis. It's a de rigeur part of any Democratic attempt to explain this crisis (with a finger pointed implicitly or explicitly at the Republicans in general, and John McCain in particular). I have no partisan axe to grind here – I'm a Democrat, if not always a very good one – but what I haven't heard is any more detailed explanation: just a naked and unsubstantiated claim.

Indeed, my mother, a bank COO, tells me that from her perspective, there's a great deal more regulation now than 10 years ago. In a recent email, she said:

We bankers have been advocating deregulation for years, but I haven't seen any lessening of regulations; in fact, I'm sure we have way more regulations now than ever before. We've spent the last four months getting ready for the newest hot button - "Identity Theft Prevention Program" requirements, creating a 70-page document that hopefully covers all that we need to do. Actually, most of the regulations are good, but sometimes they become so cumbersome and we are required to give so many disclosures, that customers don't read any of them. Case in point: A year or so ago, our Chief Lending Officer had to appear in court to testify against a customer who had defaulted on their loan. She presented their signed Loan Agreement (which, due to numerous regulations, was many pages long); the judge took one look at it, and tossed it aside, saying, "You don't really expect people to understand all of that, do you?"

Now, she's a commercial banker, not an investment banker, and there's a pretty significant world of difference between them. But I've read and heard all sorts of details about the debt instruments at the heart of this crisis: mortgage backed securities, collateral debt obligations, credit default swaps, and all the other terms that way too many folks on Main Street now know way too much about. But I haven't heard a single detail, or even a reasonable attempt at high-level explanation, as to what deregulation occurred, why it occurred, and how this specific removal of regulations (or lack of enforcement of existing regulations) contributed to the crisis.

I'm not saying it didn't happen – I'm just saying that I haven't heard any explanation or details. Does anyone know anything about this, or can anyone point me in the right direction to understand better what's being claimed here?

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