Exactly How Laissez Faire Was the Financial Sector?

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by Kindred Winecoff

I just want to tie up some loose ends on Charles Ferguson and the argument that the recent financial crisis was the end product of several decades of financial deregulation. I've already pushed back against this here and here, now Will Wilkinson piles on:

As economists Peter Boettke and Steven Horwitz have pointed out in a lucid short paper on the causes of the "Great Recession", between 1980 and 2009, four new regulatory policies were imposed on the financial sector for each regulatory policy lifted. It's simply inaccurate to describe this period as an era of deregulation. It was, on the whole, a period of decidedly increasing regulation.

Boettke and Horwitz's paper is here [pdf]. As actual laissez-faire Austrian economists, unlike Summers and other neo-Keynesians that Ferguson goes after, they point out that:

We do not live in a free market. We live in a mixed economy. The mixture varies by industry. Technology is primarily free. Financial Services is primarily government. It is not surprising that the most government regulated and controlled segment of the economy, financial services, experienced the biggest problems.

Jeffrey Friedman has made similar points [pdf]. This is more or less true. Even the biggest deregulation over this period -- the repeal of Glass-Steagall -- simply allowed U.S. banks to act more like Continental European banks always had. Is it really Ferguson's position that the financial crisis occurred because the U.S. moved towards a more European system?

I don't think it's true that the financial system would be more stable absent all (or almost all) regulation, as Boettke and Horwitz argue. But to acknowledge that is not to imply that the system we have had at all resembles a deregulated system, nor that failures can't occur despite a heavy regulatory structure. The recent financial crisis spread throughout all kinds of countries: some heavily-regulated states had crises, while others didn't. We need to acknowledge that it's not as simple as "regulation safe, deregulation risky".