Jon Krause

Confessions of a Financial Deregulator

Back in the late 1990’s, in America at least, support for financial deregulation was widespread, and the entire experiment turned out to be woefully misguided. But if it all looks like such a bad idea now, why didn’t it then?

BERKELEY – Back in the late 1990’s, in America at least, two schools of thought pushed for more financial deregulation – that is, for repealing the legal separation of investment banking from commercial banking, relaxing banks’ capital requirements, and encouraging more aggressive creation and use of derivatives. If deregulation looks like such a bad idea now, why didn’t it then?

The first school of thought, broadly that of the United States’ Republican Party, was that financial regulation was bad because all regulation was bad. The second, broadly that of the Democratic Party, was somewhat more complicated, and was based on four observations:

·        In the global economy’s industrial core, at least, it had then been more than 60 years since financial disruption had had more than a minor impact on overall levels of production and employment. While modern central banks had difficulty in dealing with inflationary shocks, it had been generations since they had seen a deflationary shock that they could not handle.

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