Confessions of a Financial Deregulator

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.

·        The profits of the investment-banking oligarchy (the handful of global investment banks, including Goldman Sachs, Morgan Stanley, and JP Morgan Chase, among others) were far in excess of what any competitive market ought to deliver, owing to these banks’ deep pockets and ability to maneuver through thickets of regulations.