Is deregulation to blame?

Is deregulation to blame for the financial mess in the US? The answer, according to Peter J. Wallison writing at Bloomberg.com, is no. Wallison writes

In the debate on Sept. 26, Democratic presidential nominee Barack Obama argued that the current crisis in the financial markets is the result of Republican deregulation.

Wallison continues

The credibility of the charge depends on ignoring several important facts:

-- There has been a great deal of deregulation in our economy over the last 30 years, but none of it has been in the financial sector or has had anything to do with the current crisis. Almost all financial legislation, such as the Federal Deposit Insurance Corp. Improvement Act of 1991, adopted after the savings and loan collapse in the late 1980s, significantly tightened the regulation of banks.

-- The repeal of portions of the Glass-Steagall Act in 1999 -- often cited by people who know nothing about that law -- has no relevance whatsoever to the financial crisis, with one major exception: it permitted banks to be affiliated with firms that underwrite securities, and thus allowed Bank of America Corp. to acquire Merrill Lynch & Co. and JPMorgan Chase & Co. to buy Bear Stearns Cos. Both transactions saved the government the costs of a rescue and spared the market substantial additional turmoil.

None of the investment banks that got into financial trouble, specifically Bear Stearns, Merrill Lynch, Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc., were affiliated with commercial banks, and none were affected in any way by the repeal of Glass-Steagall. [...]

-- Republicans have favored financial regulation where it was necessary, as in the case of Fannie Mae and Freddie Mac, while the Democrats have opposed it. In 2005, the Senate Banking Committee, then under Republican control, adopted a tough regulatory bill for Fannie and Freddie over the unanimous opposition of committee Democrats. The opposition of the Democrats when the bill reached the full Senate made its enactment impossible. [...]

-- The subprime and other junk mortgages that Fannie and Freddie bought -- and the market in these mortgages that their buying spawned -- are the underlying cause of the financial crisis. These are the mortgages that the Treasury Department is asking for congressional authority to buy. If the Democrats had allowed the Fannie and Freddie reform legislation to become law in 2005, the entire financial crisis might have been avoided.