One possibility I am considering for this panel discussion is to give a spiel on how free-market economists have been more hawkish than mainstream economists when it comes to bank regulation. I was inspired by listening to Robert Litan recount some of the history at a talk last night on Trillion Dollar Economists. You may recall that may take on that book is that it has great material, but I would have liked to see different organization and emphasis. I was reading it with my high school economics students in mind.
Anyway, here is the spiel.
Long ago, two groups of free-market economists decided to “shadow” the Fed. The Shadow Open Market Committee, which I believe started in the 1970s, issued pronouncements critical of monetary policy. The Shadow Financial Regulatory Committee (SFRC) , issued pronouncements critical of regulatory policy starting in 1986.
The SFRC had both a deregulation agenda and a regulation agenda. Their deregulation agenda was mainstream. Observers of banking regulation across the political spectrum recognized that deposit interest ceilings were no longer workable, that the Glass-Steagall separation of banking and securities was no longer workable, and that prohibitions against interstate banking and branch banking were no longer workable. People had known since the late 1960s that those regulatory boats were sinking, and the laws that Congress passed in the 1980s were just the long-awaited permission to abandon ship.
Take Glass-Steagall, for example. In 1968, the distinction between a loan and a security was obliterated by GNMA. A few years later, the distinction between a deposit and a security was obliterated by money market funds. Even though some people try to blame the financial crisis on the repeal of Glass-Steagall, the fact is that it collapsed 20 years before it was repealed and nobody has said that you could bring it back.
It was the SFRC’s hawkish regulatory agenda that was out of the mainstream. In particular, if you read through its old statements, you will see that the SFRC issued many warnings that bank capital regulations were inadequate. They pleaded for tighter regulation of Freddie Mac and Fannnie Mae, for higher capital requirements for banks, and for regulators to require banks to have a thick layer of subordinated debt which would put the onus for failure on the private sector rather than the taxpayers. These calls went unheeded. The SFRC economists were viewed as cranks, whose judgment on these matters was impaired by an irrational distrust of government agencies.
You may be running the risk of appearing to argue both that the crisis was not caused by too little regulation and that free-market economists were better because they were for more regulation. Especially if you use “hawkishness” to describe what you’re commending them for. You might wish to expand on why their recommendations could be regarded as deriving from distrust of government rather than as calls for “more regulation”.
Interesting paragraph on Glass-Steagall. I know that “the right” has always dismissed this explanation (which is so popular on “the left”) but never had a clear idea why. If you were addressing an audience as ignorant as I am (not likely), you could add a couple of sentences here as well.
quick explanation on Glass-Steagall: none of the banks that got in trouble got in trouble because of their securities trading operations. There is no direct connection between loosening Glass-Steagall and the crisis. The repeal of Glass-Steagall happened in 1989, so it preceded the crisis. Other than that, there is nothing linking it to the crisis.
Also, back in the 1980s, the big regulatory fights were not left vs. right. It was Wall Street vs. commercial banks