It’s an explanation repeated so often it’s become rote: The rollback of financial regulations during George W. Bush’s presidency helped cause the devastating financial crisis of 2008.
But researchers at the Washington-based Mercatus Center claim that the central premise of this interpretation is false. According to a new study by the free-market think tank, federal restrictions on the financial services sector actually increased 23 percent between 1999 and 2008.
The statistical analysis calls into question the efficacy of new regulations imposed by the 2010 Dodd-Frank financial reform bill. The researchers estimate a further 26 percent increase in financial restrictions over the next several years as a result of the law.
“Policymakers should reexamine the presumption that Dodd-Frank’s substantial regulatory restrictions are necessary to offset previous deregulation of the financial services sector,” they said.
The researchers examined data from the Code of Federal Regulations and determined that over 7,000 new financial rules were implemented between 1999 and 2008, bringing the total number of regulations to 47,494 just before the crash.
This period also includes when President Bill Clinton signed the Gramm-Leach-Bliley Act into law, partially rolling back the Glass-Steagall Act.
The majority of growth is attributed to new restrictions in the Patriot Act and the Sarbanes-Oxley Act, as well as a series of new rules promulgated in 2005 by the Securities and Exchange Commission.
Critics contend that the repeal of parts of the Glass-Steagall Act, particularly provisions barring the merger of investment and commercial banks, helped precipitate the crisis by unbalancing the financial marketplace.
But the study concludes that the repeal had, at most, a negligible impact on the overall regulation of the financial industry.
Hester Peirce, another Mercatus scholar and the author of “”Dodd-Frank: What It Does and Why It’s Flawed,” argued to The Daily Caller News Foundation that the repeal of Glass-Steagall did not impact America’s financial stability.
“If you look at the firms that failed in the crisis, [there was] no Glass-Steagall effect,” Peirce said. She pointed out that most large bank failures, including Countrywide, Bear Stearns and Lehman Brothers, were investment banks entirely uninvolved in traditional banking ventures.
Moreover, it would’ve been nearly impossible for private companies to rescue struggling financial institutions if Glass-Steagall had still been intact.
“A firm like JP Morgan will say, ‘Well hey, if we had had Glass-Steagall in place, we wouldn’t have been able to buy Bear Stearns,’ because JP Morgan, a traditional bank, couldn’t have bought Bear Stearns, a securities firm,” Peirce said.
“I think having those artificial distinctions in place really doesn’t get you anywhere,” she continued.
Peirce explained why the steady increase in regulations during George W. Bush’s presidency failed to avert the impending 2008 crisis.
“Just because regulators put rules in place doesn’t mean they’ll work,” she said. “Unfortunately, a lot of what the regulators have done in the financial industry is try to take responsibility away from market participants and put it into the regulators’ laps.”
“It’s that kind of regulation that makes the market much less careful than it would be otherwise,” she continued. “You had people expecting that [the government] would stand behind some of these large financial institutions. People were saying ‘Hey, we’re in the U.S., we’re in a very heavily-regulated market, and we don’t have to pay attention to things.’”
Peirce worries that new rules stemming from Dodd-Frank will further this sense of complacency. “‘Don’t worry, don’t watch for yourself, we’ll take care of you, the regulators are watching.’ That’s the whole mantra of Dodd-Frank.”
“I think we’re going to end up with worse problems in the future,” she concluded.
William K. Black, a University of Missouri, Kansas City assistant professor and former regulator, recently argued that even conservatives and libertarians should support the return of Glass-Steagall.
“It violates core principles of conservatism and libertarianism to extend the federal subsidy provided to commercial banks via deposit insurance to allow that subsidy to extend to non-banking operations,” Black wrote.
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