Tyler Cowen’s NYT column today,  Where Politics Don’t Belong, comes perilously close to the mark in identifying the key problems of the bailouts: They encourage a reliance on special Government dispensation, regulatory exemptions and taxpayer handouts:

“FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating.

Well before the financial crisis erupted, policy makers treated homeowners as a protected political class and gave mortgage-backed securities privileged regulatory treatment. Furthermore, they allowed and encouraged high leverage and the expectation of bailouts for creditors, which had been practiced numerous times, including the precedent of Long-Term Capital Management in 1998. Without these mistakes, the economy would not have been so invested in leverage and real estate and the financial crisis would have been much milder.”

Beware conflation of cause and effect: We need to separate the various elements that led to the crisis — radical deregulation, misplaced compensation incentives, rampant banker excess — with the unconscionable transfer of taxpayer wealth that followed. Unfortunately, the column seems to conflate the idea of government intervention as the same as regulation — that the bailouts are somehow the same as the radical deregulation that allowed the banks to run wild.

But Cowen is right about this much: The large banks and brokers lobbied for special treatment and got it; they manipulated government legislation for their own ends; They asked for and received special treatment. This is a unique dispensation that almost no other businesses have enjoyed — certainly nowhere near the degree the finance sectors has received. Instead of earning their way via market place competition, these financials were uniquely treated in terms of regulation, legislation and tax policy.

Indeed, many people still seem wed to the wrong belief — it was not too much regulation that caused the problems. Rather, it was the special exemptions from regulation that in reality led to the crisis. From leverage to derivatives to lending standards to interest rates, the government acquiesced to the wants of the banking sector.

Consider the conclusion this leads to: Recognizing that these institutions require oversight, that they cannot be given special regulatory exemptions, or allow their lobbyists to push their legislative agenda on the public, with the taxpayers footing the massive cleanup bill when it all goes wrong.

Banks cannot be left on their own — again — lest they blow up the world — again.


Where Politics Don’t Belong
NYT, September 13, 2009


See also:
Flaw in Free Markets: Humans


Category: Bailouts, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “Missing Radical Deregulation As a Cause of Crisis”

  1. danm says:

    I still maintain that the strongest cause of this crisis is lack of growth.

    If rules had not been bent or dropped, growth would have stalled a long time ago. And America would have gone through the wringer a long time ago.

    You can dissect it all you want, it all comes down to making the game last as long as possible.

  2. mathman says:

    “Banks cannot be left on their own — again — lest they blow up the world — again.”

    Respectfully, and not to be a doomer but, i don’t think there will be a “next time”. The convergence of the climate problem (that too many people are denying even exists), our soon to be completely worthless currency, the on-going globally mismanaged banking sector, the steady collapse of labor, wages, and jobs, coupled with the collapse of governments due to tax shortages (and their coming draconian measures to extract same), all combined with the increasing social upheaval as a result of all this (not to mention many other interrelated factors) leads me to believe we’re only at the beginning of the “end game,” from which few will emerge alive, let alone unscathed.

    Just as the IPCC models of climate change were predicting the Arctic melting of summer sea ice to happen by the end of this century – but it actually happened THIS YEAR, i feel that our coming social collapse is perhaps ten years out at best, continuing on our current path of saving the ultra rich at the expense of everyone else on (including other species and the environment) the planet.

    i really hope i’m totally wrong and will look like a complete fool for saying it.

  3. danm says:

    I’m betting that everything eill be done to keep that GDP up. No politician out there is going to change the rules if it transfers wealth from one group to the other and it obvious that it his his/her doing unless there is no other alternative. Rules will change when the rich have lost their money. We’re not there yet.

  4. some_guy_in_a_cube says:

    During the Great Banker’s Bailout of 2008, the curtain was briefly pulled back, and all got to see how things work around here now: corporate power pulls government’s strings. The same process is happening all over again with health care “reform”- corporate interests will dominate, the rest of you can fight over the crumbs.

    Sorry children, but I’m afraid this trend is just going to accelerate over the years ahead – things have gotten to be just…too big. But all is not lost – the market technicals look great right now!

  5. Moss says:

    Rather, it was the special exemptions from regulation that in reality led to the crisis

    Bingo, this is what every corporation strives for, not just the Banksters. They do not want to compete they want to be granted as much privilege as possible via influencing the policy setters and legislatures. This fact of economic and business Conservatism is what must be undone. The beneficiaries and their proxies will continue to obscure this fact with anti big government slogans in an attempt to keep the status quo in place. The truly devious part of this is that the peeps who think they are helping themselves are actually being used by the real beneficiaries at their expense.

  6. snapshot says:


    And this problem as well – from Simon Johnson @ Baseline Scenario today…

    “The politically well-connected, knowing they will most likely do fine in the next crisis, is now highly incentivised to take even more risk…..”

  7. adbutler007 says:

    “The Republic will endure until the time Congress discovers how to bribe the people with the people’s money.”

    Alexander Tytler

    “The hardest thing to explain is the glaringly evident which everybody has decided not to see.”

    - Ayn Rand

  8. V says:

    Problem is if it happens again can the US afford additional trillion dollar bailouts?

  9. Marcus Aurelius says:

    Why do we use the word ‘regulation’ when what we are speaking of is law? What good is a lawless society? When we say we want freedom, do we actually want anarchy, and if so, do we have the personal integrity to make that system work? (Answer: no, we don’t).

    If the past 20 years is any indication, here’s what ‘freedoms’ the proponents of ‘free markets’ actually want:

    The freedom (for some) to have rights without responsibilities. The freedom (for some) to loan shark. The freedom (for some) to pollute the air, land and water (without regard to the consequences). The freedom (for some) to defraud. The freedom (for some) to exploit for unlimited profit that which belongs to all of us (natural resources: oil, gas, coal, land; and public resources: airwaves, our armed forces), while being released from the obligation to return a portion of the profits derived from the windfall for the common good, via fair taxation. The freedom (for some) to take profit without acknowledging costs. The freedom (for some) to be above the law.

    Freedom for some.

    We are in the process of (re)learning that a society that deregulates (especially one that deregulates those persons or corporations that have a fiduciary duty and/or ethical/moral obligation to society as a whole), is a society that will fail.

  10. Marcus Aurelius says:

    “The hardest thing to explain is the glaringly evident which everybody has decided not to see.”

    - Ayn Rand

    I wonder if that greedy, self-absorbed, self-indulgent hose-bag ever considered that statement while looking in the mirror.

  11. porterhouse says:

    Political privilege that is bought and paid for is not radical deregulation.

    The big boys on Wall Street own more politicians that most people own neckties.

    Call political corruption, political corruption, not radical deregulation.

    True deregulation would apply to all, not the self-selected members of the “financial-regulatory complex”.

  12. Cowen’s piece is goes beyond Banking y Finance..

    “…We should stop using political favors as a means of managing an economic sector. Unfortunately, though, recent experience with health care reform shows we are moving in the opposite direction and not heeding the basic lessons of the financial crisis. Finance and health care are two separate issues, of course, but in both cases we’re making the common mistake of digging in durable political protections for special interest groups.
    One disturbing portent came over the summer when it was reported that the Obama administration had promised deals to doctors and to pharmaceutical companies under the condition that they publicly support health care reform. That’s another example of creating favored beneficiaries through politics…”

    “…Even worse, these political deals threaten open discourse. The dealmaking may be inhibiting some people in health care from speaking out in opposition to the administration’s proposals. Robert Reich, who served as secretary of labor in the Clinton administration, deserves credit for complaining about this arrangement, but not enough people are asking where such dealmaking might stop.
    The banking sector has been facing similar constraints; if bankers criticize the Treasury or the Fed, they risk losing their gilded cages and could get a bad deal when the next bailout comes. When major economic sectors can be influenced in this way, are we really very far from the nightmare depicted by Ayn Rand in “Atlas Shrugged”?
    So if we’re looking for a major lesson from our banking mess, it is undoubtedly this: We have made a grave mistake in politicizing the economy so deeply, and should back away now.”

    Though, it is interesting to note that, even, He will not finger the Federal Reserve, and its duopolistic ‘Legal Tender’-deal w/ the USG, as the lynch-pin of this Carnival ride of an ‘Economy’, and its, attendant, ills.

  13. [...] Have the bailouts created a riskier financial system?  (EconLog also Big Picture) [...]

  14. Onlooker from Troy says:

    I’ve been thinking along these lines a lot lately. Big business, more than ever, gets ahead by currying favor with the politicians (and outright bribery, of course). Our political class is so damned corrupt these days, legislating with one eye on the real job (if that) and one on what’s in it for them, and how they can parlay it into some personal wealth in the long run. Favored purchases and “investments” are undoubtedly seething below the surface.

    How is it that so many come out of office much richer than they go into office? And why hasn’t there been a massive media expose’ on that topic? I wonder why.

    Big business, as always, doesn’t want to compete. They want to crush their competition through any means possible; mostly through getting Congress to pass legislation that favors them in the market and funnels taxpayer money their way too for good measure. And our govt has been manipulated into doing just that, sometimes in the guise of some kind of social good (e.g. housing) or “apparent” regulation that really just narrows the field.

    And then we all talk about small business being the American dream and the engine of our economy; all the while setting up obstacle after obstacle in their way, making it an extremely difficult goal to accomplish. They are instead disfavored as we bow to big business.

  15. BG says:

    As a side note, I was turned down for a credit card from JP Morgan Chase this week for the first time in over 30 years. My credit history is spotless, my FICO score is in the 780 range and I don’t owe anyone anywhere a penny other than my monthly revolving credit which I pay off each month.

    I just kind of chuckled; because I only applied for the card as a means of getting a discount on an online purchase any way; but, the more troubling thing is that the rumored pulling back of credit from the consuming public is in fact true. I have also experienced over the last 12 months the cancellation of every single credit card I have, that was not actively being used.

    You will never get an economic recovery if the consumers (who are supposed to create it) are unable to get credit. We hear a lot of stuff from a lot of different people in the MSM with different agendas; but, the withdrawal of credit regardless of credit-worthiness is in fact true.

    I am not boasting when I say if I can’t get credit, no one can. It is just something I know due to my personal circumstance. As a result, real consumer credit has got to be imploding right now.

    We have never (and will not this time) experience an economic recovery while real meaningful credit contraction is going on in our consumer-led economy. It can’t happen. IMO, all the banks are still in survival mode (especially the small and regional banks which interface with the public and the real economy on Main Street). As long as they are concerned about their own survival, they aren’t concerned about yours.

  16. Trainwreck says:

    Also remember the OTC turned a blind eye to concerns regarding the profligate abuses in the Mortgage market. It wasn’t just the failed supervision of the major banks that caused this problem, but the total lack of desire to police the entire financial sector.

  17. primordial_ooze says:

    How much of a role has the tax deduction for mortgage interest payments played in the
    housing bubble? Why should those of us who rent, in effect, subsidize those who buy?
    Elimination of this subsidy could help pay down the federal debt and at the same time
    help to keep a new bubble from forming. If you can’t really afford it you shouldn’t be
    encouraged to buy it.

  18. Marcus Aurelius says:


    I’d prefer they went back to the days where all interest paid was tax deductible.

  19. franklin411 says:

    I showed the Mike Wallace interview with Ayn Rand in the 1950s in the course I taught this summer. I like to joke around, and one of my best-received bits was when during that video. In introducing it, I said “Ayn Rand was a….well…I guess I’ll call her a ‘woman.’” And then when she came on, I muttered “God, she’s gross!” The class loved it, and a few of them were truly horrified at her hateful ideology.

    Anyway, these articles are interesting, but the Cowan one is off the mark. It’s impossible to de-politicize an economy, because economics is politics and politics is economics. This is the whole reason economics is a failed discipline: it refuses to acknowledge reality and the interconnectedness of social institutions, preferring to live in an imagined world of mathematical formulae.

  20. danm says:

    How much of a role has the tax deduction for mortgage interest payments played in the
    housing bubble? Why should those of us who rent, in effect, subsidize those who buy?
    Because the paradigm/idelogy was that you are a better American if you own.

    If we go down that logical road… why should future generations subsidize current generations with these deficits? Why should the healthy pay for the sick? Why should the working pay for the unemployed? Why should I pay for roads I will never use? As soon as you have a government and you redistribute, you have subisidies of some sort.

    There are 2 huge contradictions in our lives. First of all most of us want globalization, free markets, fairness and justice but we still have countries and patriotism. Patriotism is probably the biggest hindrance to justice because it segregates.

    Secondly, our systems are getting larger but we, human beings, are made to live in small communities.

    We are all analyzing this as if we could fix this huge mess this way or that way but I just don’t believe we have as much control as we think we do. The system is probably going to come undone and a paradigm shift will occur, leaving a big wide space for a person with a new vision. This person has what it will takes but would probably amount to nothing if it weren’t for the paradigm shift. And this person will be hail for his/her genius. The writing is on the wall.

  21. danm says:


    I’ so happy I am not your students and forced to go against my beliefs, having to say what you want to hear.

  22. beagle says:

    OT: I hope no students are going into debt to listen to Franklin get his jollies (shudders)…

  23. wunsacon says:

    lol, marcus. Don’t hold back.

  24. Cunning Linguist says:


    Please, Please, PLEASE clarify that Radical FINANCIAL Deregulation is a culprit. There are too many sectors of the economy which are over-regulated. Your phrase Radical Deregulation implies that more regulation is always better than less in all sectors of the economy. This is terribly misleading.


    BR: Perhaps I should write a book covering the subject . . .

  25. [...] Cowen does it with aplomb in his New York Times column yesterday. My attention came to this through Barry Ritholtz, who gives a calm and reasonable response to Cowen’s rather loopy argument; I think [...]

  26. jr says:

    “Indeed, many people still seem wed to the wrong belief — it was not too much regulation that caused the problems. Rather, it was the special exemptions from regulation that in reality led to the crisis. ”


    “In Bailout Nation (Chapter 19), my list went something like this:

    1. Federal Reserve Chairman Alan Greenspan
    2. The Federal Reserve (in its role of setting monetary policy)”

    The primary cause was regulation/manipulation of interest rates. Its silly to think the FED can regulate (i.e centrally plan) economic growth through monetary policy (pumping money to regulate/lower interest rates and spurn growth (i.e. to blow debt bubbles)).

  27. jr says:

    “This is the whole reason economics is a failed discipline: it refuses to acknowledge reality and the interconnectedness of social institutions, preferring to live in an imagined world of mathematical formulae.”

    I could pretend that “economics” as a whole fits into this criticism, but then I’d demonstrate my lack of understanding about economics.

    Math = today’s dominant economic hegemony. But saving grace is that the good guys are on the rise, and will be proven right once again. A priori knowledge trumps monkey math every time.

  28. primordial_ooze says:

    @ damn 3:08
    On the other hand I don’t understand why schools are financed with only property taxes
    on homeowners. Those of us who rent should share in that. Everyone benefits from having
    an educated population, as well as good roads, airports, etc. My children will, and I will
    benefit from social security,medicare, national defense, etc. I don’t see why you can’t make
    a distinction between renters and homeowners when it comes to the interest on mortgages.
    It seems to me that buying a home is an individual choice about how you want to spend your
    savings, I don’t think you should get a tax break for that, especially as it helps to encourage
    people to spend more than they can really afford, which as we have seen leads to disaster.

  29. davver says:

    You can’t regulate a megabank. Once any company, organization, or special interest group reaches a certain level of power it can influence politics in any way it chooses. To believe otherwise is idealistic garbage.

    The only thing these banks have ever been afraid of is the market. The market can’t be bribed. Its time to stop protecting them from the market is the misguided believe that regulators will keep these banks under better control then the real threat of bankruptcy.

  30. danm says:


    I never said I didn’t agree. But I’m sure many don’t. And if you had a debate about it, chances are strong you’d hit a wall. And if we were to debate all the other subsidies, we wouldn’t have time to produce any GDP. I’m just saying that every single subsidy can be analyzed, debated and rationalized any single way before getting any semblance of a consensus. The world is grey and the more complext it is the greyer it is. And at the end of the day, the squeaky wheel gets the grease.

  31. mknowles says:

    Tyler Cowen wrote: “Well before the financial crisis erupted, policy makers treated homeowners as a protected political class and gave mortgage-backed securities privileged regulatory treatment.”
    It wasn’t homeowners who were protected political class, it was bankers.

  32. [...] Republican Deregulation Leads to Financial Disaster – Democratic Underground Missing Radical Deregulation As a Cause of Crisis | The Big Picture In your effort to demonize the Democratic party as the reason for every ill in this wolrd, you [...]