Deregulation and the Financial Crisis

22 May 2009 at 2:20 pm 3 comments

| Peter Klein |

Niall Ferguson joins Charles Calomiris, Jerry O’Driscoll, Arnold Kling, and many others in questioning the supposed link between “deregulation” and the financial crisis. As Ferguson emphasizes, the timing is all wrong; there is no time-series correlation between specific patterns of regulation and deregulation and particular financial or economic outcomes. The relaxation of Glass-Steagall restrictions on universal banking is an oft-cited example, but, as these writers point out, no one has offered any specific mechanism by which universal banking contributed to the problem (indeed, the opposite is likely to be true). The “laissez-faire caused the crisis” meme may be pithy, but is there any systematic theoretical or empirical evidence for it?

Ferguson has the best line (suggested by Luke): “It is indeed impressive how rapidly the economists who failed to predict this crisis . . . have been able to produce such a satisfying story about its origins.”

Entry filed under: - Klein -, Bailout / Financial Crisis, Business/Economic History, Classical Liberalism, Financial Markets, Myths and Realities. Tags: .

Elfenbein and Zenger on Social Capital Ferguson on Financial History and the Crash

3 Comments Add your own

  • 1. Barbar  |  22 May 2009 at 9:12 pm

    Right, like Ferguson is right that so many commentators simply construct “just-so” stories about the financial crisis, blaming “deregulation” and the like.

    For example, he produces the following quotes from professors:

    “Crises are more often caused by bad regulation than by deregulation.”
    “It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets.”
    “The good health of Canada’s banks is due to better regulation.”
    “The biggest blunder was… the Federal Reserve… focus[ing] exclusively on prices of consumer goods instead of taking asset prices into account.”

    Oh wait, those are all quotes from Ferguson himself. But I guess since he predicted the financial crisis in advance, his satisfying story is quite compelling.

    Ferguson says that we shouldn’t trust arguments about more regulation; he himself advocates for “better” regulation. Brilliant!

  • 2. Stephen  |  23 May 2009 at 4:03 pm

    You’ve got a typo – it’s Calomiris, not Calorimis.

  • 3. Peter Klein  |  23 May 2009 at 4:31 pm

    Fixed it, thanks!

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