On the occasion of her “farewell” address,” outgoing
Federal Reserve Board Chairwoman Janet Yellen warned against repeal or major
roll-back of the Dodd-Frank regulatory bill passed as an alleged “fix” for the
cause of the 2008 financial crisis.
The New Jersey Star-Ledger piled on in support
of Yellen. In its Central
bank to Trump: Keep your tiny hands off Dodd-Frank editorial, the S-L chastised President Trump and Republicans for
launching a “deregulation bonfire.” Building on the statists’ lie about the
causes of the crisis, the S-L announced, with an apparent straight face, “But
the Wild West days of hands-off central banking - which peaked during [the
crisis] - should remain dead and buried.”
I left these comments:
When, in recent decades, did we ever see “Wild
West days of hands-off central banking?”
When we think of the Wild West, we think of
lawlessness, where people with guns, usually outlaws, “governed” at whim.
Well, that’s a good description of the financial
regulatory regime of then, and today. After all, who has the guns? The
regulators, not the banks. And they used them to create the conditions that led
to the financial crisis. Contrary to the Big Lie being peddled by statists and
government apologists, financial regulation—every bit of which is backed by the
armed power of the state—was at a peak when the crisis hit. Government spending
on financial regulation, adjusted for inflation, tripled after 1980, peaking in
2007. Keep in mind that three big new regulatory bills were passed under Bush,
the Privacy Act, Patriot Act, and Sarbanes-Oxley. That massive regulatory
apparatus was put to use imposing ever-weaker mortgage standards to force banks
to comply with the politicians affordable housing goals under Clinton and Bush.
This was aided and abetted by Fannie and Freddie, which were ordered by both
Clinton and Bush to massively ramp up purchases of subprime mortgages.
As to central banking, the Federal Reserve under
Greenspan and Bernanke inflated the biggest ever asset inflation, the 1997-2007
housing bubble, which distorted incentives and caused a massive malinvestment
of capital. Is it any wonder that a Fed Chairwoman would hide her own agency’s
leading culpability in order to shift blame to private banks?
Yellon left out most of the “whole truth.” The
years leading up to the financial crisis certainly look like “Wild West days”—a
Wild West of political, regulatory, and monetary interference in the housing
and mortgage markets. Banks that acted badly were a secondary cause. The
government was the primary cause—which is why I believe Dodd-Frank should be
repealed in its entirety: It’s based on a lie. But, the whole truth is out
there. It is grotesquely dishonest to assert that it was a free “Wild West”
market that failed, when in fact it was a heavily regulated market that failed.
It is therefore grossly unfair to burden the entire industry with another layer
of suffocating controls for the wrongdoing of the few banks (like Angelo Mozilo’s Countrywide
Financial) that did deliberately
exacerbate the problem: This amounts to punishing the innocent many for the
wrongdoing of the few.
To protect the guilty, Dodd-Frank was sold on a
lie—the deliberate mis-identification of the fundamental causes of the
financial crisis. And now the guilty will have even more Wild West power!
Congress should start over, and start by not only looking at the secondary
causes but also at the government’s—the politicians’ own—primary role.
Related Reading:
Myth: The Great Recession was caused by free-market policies that
led to irrational risk taking on Wall Street.
Reality: The Great Recession could not have happened without the
vast web of government subsidies and controls that distorted financial markets.
Department of Economics
The subprime mortgage crisis had its origin in the program the
directors of Fannie Mae initiated in the late 1990's to pursue social welfare
goals rather than maintain financial viability.
Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis—and Why It Could Happen Again—by Peter J. Wallison
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