Deregulation

The regulatory framework that governed American capitalism from the New Deal through the 1970s was not primarily the product of socialist ideology -- it was the product of decades of documented market failures. Monopoly pricing, financial fraud, environmental destruction, workplace injury, food adulteration, and the structural instability of unregulated financial markets had each produced sufficient political crisis to generate regulatory responses. The New Deal agencies -- the SEC, the FDIC, the FCC, the NLRB -- were responses to specific, observable failures, not abstract principles.

The deregulation program of the late 1970s and 1980s reframed this history. Regulations, in the emerging neoliberal analysis, were not responses to market failures but impositions on market efficiency -- costs borne by producers and consumers alike, imposed by bureaucracies captured by the industries they nominally regulated or by advocacy groups pursuing non-economic agendas. This critique had genuine intellectual force in some areas (airline and trucking regulation had indeed largely served incumbent producers at consumer expense) but was applied far more broadly than the evidence supported.

The most consequential deregulation was financial. The Depository Institutions Deregulation and Monetary Control Act of 1980 phased out interest rate ceilings that had limited competition for deposits. The Garn-St Germain Act of 1982 expanded savings and loan institutions' permissible investments, enabling the speculative lending that produced the S&L crisis of the late 1980s -- a bailout that cost taxpayers approximately $130 billion. The Commodity Futures Modernization Act of 2000 exempted derivatives from regulatory oversight, creating the conditions for the 2008 financial crisis.

The Financial Crisis of 2008 was not a black swan -- an unexpected event outside the range of normal experience. It was the predictable consequence of deliberately constructed regulatory conditions that allowed large financial institutions to take on risks they could not absorb when those risks materialized.Adapted from FCIC Report, The Financial Crisis Inquiry Report (2011)

The repeal of the Glass-Steagall Act in 1999 -- removing the separation between commercial and investment banking that had been maintained since 1933 -- represents the clearest case study in regulatory rollback and its consequences. The argument for repeal was efficiency: combining commercial and investment banking would enable banks to offer a full range of financial services, reduce costs through scale, and compete effectively with foreign institutions. The argument against repeal -- that it would enable commercial banks to take on investment banking risks, creating institutions too large and interconnected to fail -- proved prescient in 2008, when the resulting "universal banks" required extraordinary government intervention to survive.

The capture of regulatory agencies by the industries they govern is a consistent feature of American regulatory history. The Securities and Exchange Commission, the Commodity Futures Trading Commission, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency all failed to prevent the financial innovations that produced the 2008 crisis -- partly because of genuine uncertainty about the risks, but partly because of revolving door relationships between regulators and regulated industries and because of the asymmetry of information and resources between well-staffed financial institutions and understaffed regulatory agencies.