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    What Deregulation?

    One of the more laughable fantasies recently perpetuated through the popular presses, and by power hungry politicos, is that the U.S. economy has been failed by free market economics. They brandish the torches, ready to lead the witch hunt against those greedy hedge fund managers, all while pushing for billions in new deficit spending and concentrating their own political power with new regulations.

    Before blaming our economic problems on free markets, though, shouldn’t we establish whether or not we actually, you know, had free markets?

    Professor David Henderson, research fellow at Stanford’s Hoover Institution, writes prudently about the deregulation myth in “Are We Ailing From Too Much Deregulation?” in a libertarian think tank based in Washington, D.C., the Caito Institute’s Policy Report. His study reveals some surprising results.

    Firstly, the average number of pages of new regulation bills rose steadily from 50,000 to 75,000 between the Regan and GWB years. This indicates that regulations passed contain more information about new rules and red tape than in previous years. The number of people employed by government regulatory agencies grew by 63 percent between 1980 and 2007 to almost 250,000. In the banking and finance industries, regulatory spending between 1980 and 2007 almost tripled, rising to over $2 billion. Why the increased man power and funds? To cover the increased demand created by all those extra pages in those regulatory bills. While these facts don’t necessarily tell us the details about all this regulation, it is clear that it was government regulation of the housing markets which helped inflate the bubble. The Clinton administration leaned heavily on semi-nationalized mortgage firms, like Freddie Mac and Fannie Mae, to grant sub-prime loans to those who couldn’t afford them. The financial sector used the newly created demand from this sector and, for a time, successfully capitalized off of it.

    Politicians like to blame those “greedy investors” for packaging, insuring, selling and, eventually, bankrupting on mortgage-based derivatives, but what about Clinton’s greed, when he created an unsustainable business sector out of thin air for some votes?

    We must also tread carefully when labeling government action as “deregulation” or “regulation.” As part of Clinton’s 1997 tax plan, he cut capital gains tax – a tax on money made through investments – on profits from the sale of a principal residence. On the surface, this type of tax cut looks like a deregulation event, but when the government has different tax rates on different sectors of the economy, investors will put their money where there is the most profit. As a result, the housing market became the least taxed sector and it went through a boom. This, coupled with the growth of the subprime mortgage markets and loose monetary policy, which helped supply easy money to investors, was how government interference in markets lead to the unsustainable growth of the housing markets.

    It is demonstrably simplistic to say that our economy suffers from too much “deregulation,” especially considering the known effects that the government had on the housing markets. The problem, now, is that how the markets will absorb the new regulations, in the short and long term, are largely unpredictable, so we can’t say how they will ultimately affect the economy.

    The public is, quite understandably, upset about how administrators of the failing financial industries are using their federal bailout money to finance bonuses and pay-offs to their executives. Nobody could have predicted this would happen, but the answer is not to pass new regulations that dictate how companies are able to spend bailout money, they will probably find loopholes anyway. The answer is to stop providing bailouts and let “greedy” investors learn from their mistakes the hard way. The government is pursuing new deficit and inflationary spending, all in the name of regulating the economy, and we really have no idea what we are in for.

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