The Credit Crisis as just one aspect of the "Deregulatory State"

In talking about sustainable democracy, I have often asserted that capitalism cannot operate appropriately without the state's actions that create a more balanced market, one that serves the public good and not just the private greed.  This is but one aspect of the broader democratic requirement that government function for the good of the people and not for the protection of a few special interests.

Lawrence Gosten at Georgetown has just published a readable and dead-right essay on "The Deregulatory State", 38 Hastings Center Report 10 (2008), available on SSRN.  He notes that the conservative effort to demonize the state has resulted over the years of the Bush Administration in a concentrated effort to claim preemption of state protective regulations by federal rights to act that has been accompanied by a concentrated effort to make state remedies, such as tort laws, inapplicable to those same industries.  At the same time, privatization--relying on "free markets" to achieve government functions through contracting out or starving government agencies of funds to carry out objectives--has been pushed, again resulting in less government oversight and less focus on the public good.  The result is a failure of the federal government, because it is acting in favor of big corporations and abdicating its responsibilities to citizens.

In describing the effective of the preemptive deregulation, he says that "the public remains unprotected prospectively because the federal government both declines to regulate and suppresses state efforts to do so.  And the public is unprotected retrospectively because of the court's invalidation of state tort law. In short, the public is left to fend for itself."  And the result of the privatization and preemption is that the public is shortchanged.  He concludes:

If the government drastically reduces regulation and enforcement and leaves core government duties to the private sector, current and future generations will suffer. Indeed, it was in recognition of the palpable harms of the free market that health, safety, and environmental regimes and civil justice systems emerged. They have evolved over a long period to work synergistically in their protective effect; the whole system is now under serious threat.

 

Comments

[Taxrascal]

Are you sure deregulation is the exact problem, here? This seems to be the latest in a series of disastrous half-deregulations: the in the early 1980's, the S&Ls got looser capital requirements -- but more deposit insurance; in the late 1990's, California had floating wholesale energy prices -- and fixed retail prices; and now we have a freely-trading financial market -- dominated by government-guaranteed mortgages with government-created tax advantages. Would Fannie, Freddie, and the mortgage tax deduction exist in a truly deregulated state?

[LindaMBeale]

taxrascal

The government didn't actually guarantee Fannie and Freddie. It chartered the companies, but they were privately owned enterprises that lobbied for beneficial treatment just like all the other biggies. Investors invested, however, making an assumption that the quasi-governmental status and importance of the function of Fannie and Freddie would lead the government to save them if they got too deep in risk. Ultimately, the investors were correct about a government takeover, though the manner in which it was done probably left those investors without the same profits they would have had if it had been an explicit guarantee.

The problem with your argument about "half deregulation" is that it assumes that if you got rid of any regulation whatsoever the problems would have been less instead of greater. The credit crisis around the mortgage blowup is centered in two things--the credit default swap mess and the free-flowing securitizations of risky mortgage loans. Blame rests on the failure of regulation of the banking industry and of derivatives, and with those private banks that decided to bypass the Fannie/Freddie restrictions on kinds of mortgages that could be securitized. Lehmann and Bear Stearns and the other investment banks bought up mortgages and securitized them directly, paying themselves the fees that would otherwise have gone to Fannie or Freddie. They didn't have the same restrictions, so could (and did) gobble up subprime and other riskier mortgages. That process over the last eight years built an enormously risky house of cards with no regulatory apparatus to underpin it.