Morons and Banking Regulation

In 2008, the US banking system collapsed, dragging down much of Europe’s with it. The problem was allowed to occur because deregulation in the 80s and 90s had taken away many of the rules that would prevent high-risk lending for short-term profit.

This much is well known… except by morons. Barely had the public been forced to rescue the banks and save the economy from meltdown, before free-market fundamentalists were rewriting history. The problem (they said) wasn’t too little regulation, but too much.

A recent tweet from Sam Bowman of the Adam Smith Institute (a poorly-named organisation, given that Adam Smith himself believed markets needed regulating) showed that refusal to face facts is still alive and well:

Or to paraphrase – banks DON’T need to be regulated, silly!

This is a moron meme that I often see on Twitter, so here are some quick and easy answers to the above question (thanks to contributors on Twitter).

  1. If you think the US banks were over-regulated, you must have missed out on all the deregulation since Reagan was elected in 1980. I’d recommend reading The Big Short, a detailed account of how stupidity was allowed to rampage unchecked through the US financial system.
  2. In Sweden, a poorly-regulated banking system faced collapse in 1992. The Swedes fixed their regulation and so didn’t face the same problems as the US, UK and other less-regulated places.
  3. A similar collapse happened in Spain in the 1970s; in response, Spanish banking regulations were tightened up immensely. When the UK’s poorly-regulated banks began collapsing in 2008, Spain’s banks were far less exposed. Who came to buy distressed British banks? A Spanish bank called Santander. Santander now owns a number of previously British-owned banks. Regulation clearly beats non-regulation.
  4. And yet again… Canada came through the crisis relatively unscathed, because its regulation was biased against low-deposit house purchases.

The Adam Smith Institute claims to promote market ideas; but the market has spoken very clearly. Banks in those countries with strong regulation are clearly stronger than in those without, especially the US. The US and UK economies and banking sectors have shrunk more than those in other Western countries, losing global share. Well regulated banks have gobbled up poorly regulated ones. The market has spoken, and the market says: regulation beats deregulation.

Here’s a simple question for those claiming the 2008 collapse was the result of regulation: specifically which regulation(s) led to sub-prime lending, forced the securitisation of bad loans into investment instruments, or pushed the ratings agencies to decide that these poor investments were AAA-rated? Morons can never answer this – it’s easy to claim regulation is bad, but apparently impossible to provide details of which regulations caused the problem (largely because they don’t exist).

Market fundamentalists make the false assumption that a laissez faire approach to bank regulation would allow the “good” banks to thrive as the “bad” ones go under; but it’s not that simple. Capitalism encourages risk-taking. The fact that one bank takes a bad risk and fails doesn’t stop other banks from risk-taking – their spin of the roulette wheel will come sooner or later. Only regulation can stop stupid risks from building up in the system – there is no free market mechanism to prevent them.

Perhaps I’m being unfair in assuming Sam Bowman has no clue on this subject – after all, he is (I assume) paid to dish out his market-fundamentalist dogma. The morons who repeat it unpaid have less excuse.