After the financial meltdown that has brought the entire world to it’s knees, people are looking for action. It’s easy enough to understand, since people tend to be reactionary. If something happens, they want someone to do something. With President Obama in the White House, these people should be feeling just fine it seems.
President Obama has proposed a new regulatory agency that will “protect” people from risky financial products. Of course, since there is risk involved in any kind of financial product, it’s entirely possible that nothing will be left untouched. Of course, as I said earlier, to a lot of people, this is what should happen. And, to be honest, the mainstream media hasn’t exactly laid out both arguments as to the causes for this crisis.
Typically, the argument is that deregulation allowed people to go buck wild and take advantage of the now looser restrictions on what they could and couldn’t do. Frankly, it sounds pretty plausible right? Especially since we all know that banker are inherrently evil. But there’s another argument that you should know.
To start with, let’s take a look at the so-called “deregulation”. This term indicates massive changes in the regulatory framework of our financial system. Of course, there were actually only three significant acts of deregulation, as outlined by Reason’s Anthony Randazzo. Randazzo does a pretty good job of showing how the financial meltdown wasn’t the result of deregulation. So, if not that, then what?
The guilt probably falls on a piece of legislation called the Community Reinvestment Act. The purpose of this law was to prevent discriminatory practices, which on the surface sounds great. However, a 1995 change in the law laid the groundwork for groups like ACORN to protest banks they felt weren’t engaging in enough minority loans, which in turned created an environment where banks made loans of a questionable nature. Failure to issue a loan carried the potential risk of being picketted by a group claiming to be for the little guy.
This created an environment where more and more people bought houses. Again, this sounds like a good thing. However, when tons of people are buying houses, the law of supply and demand kicks in and prices skyrocket, as was the case. Basically, it creates a bubble. Like all financial bubbles, it eventually burst.
Normally, this would suck but we’d get over it. But in this case, these loans were tied to mortgage backed securities which lost value rapidly and screwed the whole thing up. It wasn’t a lack of regulation on these securities that caused this mess either, but instead it was simply a symptom of the problem.
Time and time again, the government uses a crisis as justification to step in with more regulations, then claims that the next crisis is a result of not enough regulation. It’s not. It’s the result of regulation. Period. Nothing more, nothing less. The government enacts feel good legislation, like the Community Reinvestment Act, and then ignores the ramifications of such legislation.
There’s a reason that Jefferson once said that “government that governs best, governs least”…or something like that.
