A lot of people, including pretty much everyone in academia, including supposed libertarians in academia, agree that deregulation has been happening.
Everyone agrees that the US banks were “deregulated” – in that a seventeen page law governing their permitted activities was replaced by three thousand pages of laws governing their activities, which three thousand pages were not so much laws, as headings for regulators to title their decisions. It is impossible to say how many pages of regulations were created, since the extraordinary flood of regulations bypassed the normal mechanisms such as the federal register, and consist of all manner of document categories – not only does no one know how much regulation there is, no one even knows how to find all the regulations that there are.
This was indeed “deregulation” in that activities that banks were previously forbidden to do, were now permitted under the supervision of regulators.
And most of these new activities turned out to be staggeringly costly for taxpayers, and continue to be so.
What happened was not that the government got out of the banking business, but that the government got further into the banking business, making case by case banking decisions on the basis of political considerations, and predictably losing money hand over fist. One such set of decisions, one of many, was case by case approving anything that led to more lending to non Asian minorities – which is how most of the money in the US was lost, though by no means all the money. Most of it was lost in the crisis on loans to non asian minorities, and such little of it as was lost on whites, was lost to whites largely as a result of across the board reductions in credit standards partly motivated by desire to benefit the poor in general, but largely motivated by desire to benefit non Asian minorities in particular.
Government decisions are usually incompetent, and on the rare occasions that they are competent, are competently motivated by short term politics rather than long term profit and loss, so if government increases its decision making burdens, it will reliably lose more money and create more havoc. Deregulation is beneficial if it gets the government out of business activities. It is harmful if it gets the government into business activities, if it substantially increases government decision making and government employment, which banking “deregulation” clearly did. If you wind up with more regulators exercising more power, it is not deregulation, or if, in some sense it is deregulation, in that the banks were doing lots of stuff that was previously forbidden, it is nonetheless apt to be massively damaging, for the new stuff the banks were doing was largely motivated by politics, not profits, as was obvious in the activities of those that lost most of the money: Fannie, Freddy, the FHA, Countrywide, and Washington Mutual.
These highly political banks would make politically motivated decisions that were obviously going to lose a bundle and rationalize them on the basis of incoherent politically correct nonsense and magical thinking. When these decisions started to predictably lose gigantic amounts of money, accounting rules were hastily altered to delay reporting these losses, altered for everyone, not just badly run banks – and remain altered for everyone to this day, even though the losses have become obvious.
That the government agencies, Fannie, Freddy, and the FHA would be badly behaved and politically motivated was inevitable and predictable. If you have government agencies playing with large amounts of money, that the money will disappear is inevitable and predictable. Bernanke, however, was piously puzzled that privately run banks, in particular Countrywide and Washington Mutual, would make decisions that were going to lose colossal amounts of money.
One might suppose that Countrywide and Washington Mutual made million dollar loans to people with no income, no job, no assets, and no credit rating because the government had changed the rules to allow the banks to unload these loans onto some other sucker, that other sucker usually being Fannie or Freddy, but the worst behaved banks, Countrywide and Washington mutual were not able to unload all their dud loans onto some other sucker. When the state of the loans could no longer be denied, Countrywide and Washington Mutual, and a great many other banks, went down with their loans.
Rather, it was in large part the other way around. Banks made politically motivated dud loans, then begged the government for ways to unload those loans on some other sucker.
And why did they make politically motivated loans? Partly it was that the CRA mandated politically motivated loans. Partly it was political correctness. The regulators demanded not merely politically correct behavior, but also politically correct belief, demanded holy zeal for the true faith, and got it. Partly it was that the leadership of Countrywide and Washington Mutual did not rise to the top by pleasing shareholders, but by pleasing regulators, and in large part, by pleasing regulators with the purity of their political faith. Not only were banks rewarded and punished according to the holiness of their faith, but bankers rose and fell more according to the holiness of their faith, than their ability to make money. Bankers sincerely believed, or sincerely believed that they sincerely believed, that Mexicans and blacks were under served, and therefore that anything that got in the way of serving blacks and Mexicans, such as requiring jobs, income, and a credit rating, was irrational and racist.