Critics blaming the Bush and Clinton administrations’ deregulation of the financial industry for the economic crisis have it all wrong, says Harvard economist Niall Ferguson.
Dangerously wrong
No, rather it was the wrong kind of regulation and bad fiscal policy by the Fed that fueled the subprime mess and other fiascoes.
The point: The rush today to pile on new regulations by Washington D.C. politicos is a prescription that is not only misguided and too late, but that will do more harm than good, the economist says in his New York Times op-ed, Diminished Returns.
Regulating for regulations sake will rob the economy of the good kind of financial innovation we need, Ferguson argues.
“We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.”
For a counterpoint from a Harvard Business School colleague, read Thomas McCraw’s Regulate, Baby, Regulate in The New Republic. Says he:
“If we don’t reinvigorate regulation as well, the credit system will remain sick, banks won’t fully recover, and investors and borrowers will keep on believing — correctly — that they’ve been hoodwinked and fleeced… Without this reform, other shady financial practices will emerge, just as they’ve done throughout history, and the money poured into stimulus will have been wasted.”
Where do you weigh in on this debate? Is unfettered capitalism the source of our sorrows?
