Dr Phil’s Deregulatory Prescription

Phil Gramm, Ph.D. (Econ):

“There is this idea afloat that if you had more regulation you would have fewer mistakes,” he said. “I don’t see any evidence in our history or anybody else’s to substantiate it.” He added, “The markets have worked better than you might have thought.”

Really? Maybe Gramm should have a look at Spain. Or, in the other direction, Iceland — which has now, thanks to zero bank regulation, found itself on the hook for billions of dollars of UK and other European deposits — a liability which could easily approach the island nation’s entire GDP.

This entire crisis was precipitated by the rash actions of unregulated subprime mortgage originators. If they had been regulated at all we would be in much better shape right now. Yes, the dynamics of international capital flows would probably have caused an unsustainable rise in lending no matter what. But at least that money might have gone into something productive, rather than causing a catastrophic housing bubble.

I would be interested to hear Gramm expand on these remarks, though. In what way have the markets worked reasonably well of late? Unfortunately, as Justin Fox says, he’s unlikely to do so. Gramm is good at providing anti-regulation soundbites; he’s not good at serious analysis. His doctorate (University of Georgia, 1967) notwithstanding.

Update: Gramm does have a great quote at the end of the article:

“By and large, credit-default swaps have distributed the risks. They didn’t create it. The only reason people have focused on them is that some politicians don’t know a credit-default swap from a turnip.”

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