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Deregulation Argument is Nonsense

October 6, 2008

Liberals have been arguing that the root of the financial crisis is the repeal of the Glass-Steagall Act of 1933 by the passage of the Gramm-Leach-Bliley Act which they allege led to masssive deregulation which they say caused the mortgage crisis. We, on the other hand track this mess back to the Carter Administration and the Community Reinvestment Act which forced lending institutions to lend “equitably” to those in their communities. The lending standards were lowered during the Clinton administration. Sebastian Mallaby writes in WaPo 

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University‘s Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn’t been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

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