Is Bank Deregulation Dangerous?

Among last week ’s news items that had colleagues asking me, “What’s your answer tothis?, ” wasa piece byQuartz’s John Detrixhe, telling its readers that, according to “300 years of financial history,” rolling back bank regulations is a good way to trigger a financial meltdown.Though you may be surprised to hear me say it, there ’s some truth to Mr. Detrixhe’s thesis. While government intervention in banking typically does more harm than good, it’s also true that, unless it’s done carefully, deregulation can itself lead to trouble. As I put it some years ago inaCato Journal article (reprinted recently inMoney: Free and Unfree), “Dismantling bad bank regulations is like cutting wires in a time bomb: the job is risky and has to be done in carefully ordered steps, but it beats letting the thing go on ticking.”Back in the 1980s, for example, when U.S. bank regulators phased-out depression-eraregulation-Q type restrictions on the interest rates depository institutions could pay to their depositors, they unwittinglyfreed a moral hazard genie that those regulations had kept bottled-up for several decades.Did that make deregulating interest rates a bad idea? It didn ’t, first of all because had those rates not been deregulated banks and S&Ls would have taken a licking from new Money Market funds, and also because regulators might have avoided the moral hazard problem by allowing banks to offer competitive interest rates on uninsured deposits only. The phas...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs