Deregulation and the Financial Crisis: Another Urban Myth

The widely accepted narrative, prominent in the media and pressed by the Obama administration, is that the crisis was caused by deregulation—the “repeal” of the Glass-Steagall Act and the failure to regulate both derivatives and mortgage brokers—which allowed excessive financial innovation, risk taking, and greed among financial players from mortgage brokers to Wall Street bankers. With this diagnosis, the proposed remedy is more regulation and government control of the financial system, from the over-the-counter derivative markets to mortgage brokers and the compensation of CEOs. The problem for the administration’s narrative is that its principal examples do not stand up to analysis: the repeal of a portion of the Glass-Steagall Act did not eliminate the restrictions on banks’ securities activities (they were left unchanged), the mortgage brokers were responding to demand created by the government, and, there is no evidence that the failure to regulate credit default swaps (CDS) had any effect in causing or enhancing the financial crisis.

Click here to read the full publication →