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The Myth of Deregulation and the Financial Crisis

by Patrick McLaughlin on September 24, 2013

in New Publications, Regulation

In an opinion piece on American Banker, Rep. Jeb Hensarling wrote that:

The great tragedy of the financial crisis, however, was not that Washington regulations failed to prevent it, but instead that Washington regulations helped lead us into it.

Even putting aside the issue of causality, my colleague Robert Greene and I recently examined the data on regulatory growth as we sought to answer the question, “Did Deregulation Cause the Financial Crisis?” Our conclusion was that there was no measurable, net deregulation leading up to the financial crisis.

The data on regulatory growth came from RegData, which uses text analysis to measure the quantity of restrictions published in regulatory text each year.  The graph below shows the number of regulatory restrictions published each year in Title 12 of the Code of Federal Regulations, which covers the subject area of banks and banking, and Title 17, which covers commodity futures and securities trading.  Deregulation would show a general downward trend.  Instead, we see that both titles grew over that time period. The only downward ticks we see occurred because of some consolidation of duplicative regulations from 1997 to 1999 (see our article for more details on that).

As we wrote at the time:

[W]e find that between 1997 and 2008 the number of financial regulatory restrictions in the Code of Federal Regulations (CFR) rose from approximately 40,286 restrictions to 47,494—an increase of 17.9 percent. Regulatory restrictions in Title 12 of the CFR—which regulates banking—increased 18.2 percent while the number of restrictions in Title 17—which regulates commodity futures and securities markets—increased 17.4 percent.

  • anonymous

    it seems that merely counting the number of regulations is a poor measure of how regulated a market is – imagine that we abolished the prohibition against stealing but instituted a new regulation against stealing on Sundays. We now have the same number of rules, but we have definitely weakened the laws against property theft.

  • w nieder

    Unknown dude, how else would you measure it??
    Many on the left have argued how deregulation caused
    the govcession of 2008..

  • neroden

    This is ludicrous. Counting the number of regulations doesn’t mean anything.

    The problem is that simple regulations with TEETH, like the Glass-Steagal outright prohibition on combining insurance companies and depository banks, were repealed and replaced with Rube Goldberg regulations with loopholes you can drive a truck through.

    Effective regulation is simple and brutal — outright bans on troublesome activity.

    The longer and longer lists of regulations indicate DEregulation — they indicate attempts to patch up around the legalization of essentially criminal activity. It’s like having a very complex set of regulations on when you are allowed to steal things…. versus the sensible thing, which is just prohibiting stealing.

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