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  1. #1
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    Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    An interesting work by a couple of economists out of George Mason;

    Three years ago the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Deregulation of the financial services sector in the years leading up to the 2008 crisis was—and still is—used to justify Dodd-Frank’s substantial regulatory burdens. But financial regulation did not decrease in the decade leading up to the financial crisis—it increased.



    Using the Mercatus Center at George Mason University’s RegData, we find that between 1997 and 2008 the number of financial regulatory restrictions in the Code of Federal Regulations (CFR) rose from approximately 40,286 restrictions to 47,494—an increase of 17.9 percent. Regulatory restrictions in Title 12 of the CFR—which regulates banking—increased 18.2 percent while the number of restrictions in Title 17—which regulates commodity futures and securities markets—increased 17.4 percent.

    RegData measures regulatory restrictions by counting the number of restrictive words and phrases—such as “may not,” “must,” “shall,” “prohibited,” and “required”—in each title of the CFR. Developed by Patrick A. McLaughlin and Omar Al-Ubaydli, RegData is computer-based and thus only able to calculate regulatory restrictions for 1997 and subsequent years because electronic copies of the complete, annual CFR are publicly available from the Government Printing Office for only that time period.

    Total regulatory restrictions pertaining to the financial services sector grew every year between 1999 and 2008, increasing 23 percent during this time. The Patriot Act, the Sarbanes-Oxley Act, and Regulation NMS all contributed to this growth. The repeal of parts of the Glass-Steagall Act via the Gramm-Leach-Bliley Act did not result in noticeable deregulation of the financial services sector. Nor did the Commodity Futures Modernization Act facilitate overall financial deregulation. Not even the Financial Services Regulatory Relief Act of 2006, legislation intended to decrease regulatory burdens on the financial industry, reversed the ever-growing burden of regulatory restrictions faced by the financial services sector in the years leading up to the financial crisis.

    Net decreases for Title 12 regulatory restrictions between 1997 and 1999 largely reflect an effort to streamline regulatory text. Only the FDIC portion (volume 4) of Title 12 experienced a significant decrease in pages between 1997 and 1998, and it was almost entirely isolated within 12 C.F.R. § 335, which was shortened from 136 to 7 pages in an effort to streamline FDIC regulations with pertinent SEC Securities Exchange Act regulations. Similarly, the comparatively small decrease in overall regulatory restrictions in Title 12 between 1998 and 1999 is in large part attributable to the Federal Reserve’s 1999 consolidation of Regulation G—which pertained to nonbanks’ extension of leverage for the purpose of purchasing certain securities—with Regulation U, which was revised to be applicable to both banks’ and nonbanks’ extension of leverage. Without this consolidation, Title 12 pages would have increased between 1998 and 1999. Neither of these episodes had any relation whatsoever to Gramm-Leach-Bliley or the Commodity Futures Modernization Act.

    As we show in this analysis, financial regulatory restrictions increased 17.9 percent in the years leading up to the crisis. Without the streamlining efforts of the late 1990s—which reduced duplicative regulatory text and were unrelated to the acts of Congress typically blamed for alleged deregulation—this figure would likely be even higher. In Dodd-Frank: What it Does and Why it’s Flawed, we used the RegData methodology to estimate that Dodd-Frank will cause a 26 percent increase in financial regulatory restrictions. Policymakers should reexamine the presumption that Dodd-Frank’s substantial regulatory restrictions are necessary to offset previous deregulation of the financial services sector. On net, RegData shows that no such deregulation occurred. In fact, the financial sector was increasingly regulated over the decade leading up to the financial crisis.

    http://mercatus.org/publication/did-...ion-dodd-frank
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  2. #2
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Just a quick follow up question: Has anyone actually been put on trail for, convicted of, or (most importantly) penalized for violating one of these regulations?

    I would like to see on the same plot vs. time, the number of indictments and prosecutions of any violations of the regulatory financial laws.
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  3. #3
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    I guess that would depend on which regulation you are specifically referring to, not all of them contain criminal or even civil prosecutorial powers. That would be a harder graph to figure out for a couple of reasons. The SEC often doesn't disclose its convictions and has an oddly bizarre internal prosecution scheme where SEC staff act as judges (something the SEC wins quite often with, which isn't surprising http://www.wsj.com/articles/sec-is-s...nts-1413849590). Additionally, the SEC and DOJ often will go to arbitration or give "Consent Orders" which are far, far less expensive than a full prosecution and will often get firms to engage in activities the SEC finds advantageous far more easily than a court case.

    To take a quick stab at it though I would point out that there are quite a few cases that the SEC alone (and the DOJ conducts the vast, vast bulk of this kind of prosecution) has conducted. It conducted more than 120 criminal prosecutions in 2014 (http://www.sec.gov/News/Speech/Detai.../1370541342996), which is quite a lot given that that makes up less than 10% of these kinds of cases.

    On the civil side, the SEC does release lists of more prominent cases: http://www.sec.gov/litigation/litreleases.shtml Though remember these don't include Consent Orders, Pleas, or Arbitration orders.




    Now, that aside, I'm not really sure what that has to do with the study. Even if the Government was being lax on enforcement, that wouldn't be support for the idea that deregulation caused the crises, right? The best it would argue is that the additional regulation didn't help prevent the crises. And that would, of course, be presuming there was a mechanism that a) would have been prevented by enforcement, and b) that the crises wasn't precipitated by the regulations themselves.

    All of the above is a much larger economic debate however. What does seem clear is that we can at least lay the persistent myth that deregulation caused the crises to bed. Not only has there been no serious mechanism proposed by economists through which that would have happened, but we can clearly see that the level of regulation, and more importantly the scope of regulation increased, rather than decreased leading up to the recession.
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  4. #4
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by Squatch347 View Post
    I guess that would depend on which regulation you are specifically referring to, not all of them contain criminal or even civil prosecutorial powers. That would be a harder graph to figure out for a couple of reasons. The SEC often doesn't disclose its convictions and has an oddly bizarre internal prosecution scheme where SEC staff act as judges (something the SEC wins quite often with, which isn't surprising http://www.wsj.com/articles/sec-is-s...nts-1413849590). Additionally, the SEC and DOJ often will go to arbitration or give "Consent Orders" which are far, far less expensive than a full prosecution and will often get firms to engage in activities the SEC finds advantageous far more easily than a court case.

    To take a quick stab at it though I would point out that there are quite a few cases that the SEC alone (and the DOJ conducts the vast, vast bulk of this kind of prosecution) has conducted. It conducted more than 120 criminal prosecutions in 2014 (http://www.sec.gov/News/Speech/Detai.../1370541342996), which is quite a lot given that that makes up less than 10% of these kinds of cases.

    On the civil side, the SEC does release lists of more prominent cases: http://www.sec.gov/litigation/litreleases.shtml Though remember these don't include Consent Orders, Pleas, or Arbitration orders.
    Oh, I agree that it would be quite hard to determine with accuracy. But this is precisely why I'm skeptical of simple studies that prove a simple point --there's thousands of individual factors are play here.

    Quote Originally Posted by Squatch
    Now, that aside, I'm not really sure what that has to do with the study. Even if the Government was being lax on enforcement, that wouldn't be support for the idea that deregulation caused the crises, right? The best it would argue is that the additional regulation didn't help prevent the crises. And that would, of course, be presuming there was a mechanism that a) would have been prevented by enforcement, and b) that the crises wasn't precipitated by the regulations themselves.

    All of the above is a much larger economic debate however. What does seem clear is that we can at least lay the persistent myth that deregulation caused the crises to bed. Not only has there been no serious mechanism proposed by economists through which that would have happened, but we can clearly see that the level of regulation, and more importantly the scope of regulation increased, rather than decreased leading up to the recession.
    I don't see how your argument holds up. Let's suppose --again, a hypothetical-- that regulation has been relaxed in the form of overly lenient prosecutorial discretion (Again, hypothetically having nothing to do with the revolving door that the SEC and Wallstreet has). If that's true, then the effects of these laws are impossible to determine one way or the other, and thus deregulation isn't even an empirically valid thing to look into.


    To understand this, let's take a second hypothetical. Suppose that we live in a society where it is illegal (criminal) to discriminate against X group of people. However, the courts never actually stops anyone from discriminating against persons in group X. Then, suppose that even as the number of laws increases against discriminating against X, the amount of Xist discrimination increases throughout the years.

    Question: Is this empirical evidence that increased anti-discrimination laws do not help people being discriminated against?
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Is there any way to weigh the impacts of these regulations and those of Dodd-Frank? I mean how ponderous was it on corporate america was it to insist that the CEO of a company sign the tax return and what effect did that have?
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  6. #6
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by GoldPhoenix View Post
    Oh, I agree that it would be quite hard to determine with accuracy. But this is precisely why I'm skeptical of simple studies that prove a simple point --there's thousands of individual factors are play here.



    I don't see how your argument holds up. Let's suppose --again, a hypothetical-- that regulation has been relaxed in the form of overly lenient prosecutorial discretion (Again, hypothetically having nothing to do with the revolving door that the SEC and Wallstreet has). If that's true, then the effects of these laws are impossible to determine one way or the other, and thus deregulation isn't even an empirically valid thing to look into.


    To understand this, let's take a second hypothetical. Suppose that we live in a society where it is illegal (criminal) to discriminate against X group of people. However, the courts never actually stops anyone from discriminating against persons in group X. Then, suppose that even as the number of laws increases against discriminating against X, the amount of Xist discrimination increases throughout the years.

    Question: Is this empirical evidence that increased anti-discrimination laws do not help people being discriminated against?
    I think this is just a reflection of the shallow understanding of the relevant economic/sociological methodology. I imagine the relevant question isn't about what's on the books, but rather something like what real burden these companies bear as a result of the regulatory scheme (which includes the decisions of regulators).

    Tentatively, I find a few things problematic about this analysis:

    (1) It doesn't provide evidence against the notion that additional regulations could have prevented or blunted the financial crises (perhaps with additional provisos like prevented more damage than the additional burden of the new regulations, modulo whatever timescale, etc.)

    (2) It argues from the number of restrictions rather than, say, the weight or the nature and quality of the restrictions. Streamlining texts by, say, eliminating redundant language may not actually reduce the regulatory burden. Eliminating a restriction and imposing a new restriction might result in a net decrease of regulatory burden.

    (3) Salmon and baby blue are a terrible color scheme.
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  7. #7
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by GoldPhoenix View Post
    Oh, I agree that it would be quite hard to determine with accuracy. But this is precisely why I'm skeptical of simple studies that prove a simple point --there's thousands of individual factors are play here.
    Well presumably, being trained economists they have considered many of those factors in their work and have a nuanced interpretation. Nor would I necessarily call it "simple" even if it is briefly written. This study looked at the depth and scope of the regulations imposed upon the financial industry as part of its analysis. They also, in detail, analyzed the effects and purposes of the initial decrease in regulatory page length, if not scope.

    Regardless, I'm not aware of anyone in the financial industry (which I'm a part of) really seriously taking the notion that the SEC is lax on its enforcement. If anything the SEC has been over zealous during the last 20 years as it has sought to increase its scope and budget.


    Quote Originally Posted by GP
    I don't see how your argument holds up. Let's suppose --again, a hypothetical-- that regulation has been relaxed in the form of overly lenient prosecutorial discretion (Again, hypothetically having nothing to do with the revolving door that the SEC and Wallstreet has). If that's true, then the effects of these laws are impossible to determine one way or the other, and thus deregulation isn't even an empirically valid thing to look into.
    Let's assume that were true. Let's assume that the SEC has completely dropped the ball and hasn't prosecuted a single case in 20 years. Let's even take the example to its extreme and say that they signaled firms that this would be the case so everyone knew the regulations weren't going to be enforced.

    Given that scenario is the following statement true or not?

    De-regulation caused the financial crises.


    Clearly the answer is no! Because there was no deregulation, that is their point. Both the scope and magnitude of regulation increased during that period. We might conclude that it was the wrong regulation or not enforced or whatever, but we clearly can't maintain that it was a reduction in regulation that led to the crises.

    Quote Originally Posted by GP
    Question: Is this empirical evidence that increased anti-discrimination laws do not help people being discriminated against?
    For a guy who gave me such a hard time recently for his perception that I didn't read his OP, you didn't read this OP very carefully . This kind of claim is nowhere to be found in the article, the OP, its Title, anywhere. The analogous question for your scenario is: "Is there empirical evidence showing the removal of anti-discrimination laws led to more people being discriminated against?"


    Quote Originally Posted by CowboyX View Post
    Is there any way to weigh the impacts of these regulations and those of Dodd-Frank? I mean how ponderous was it on corporate america was it to insist that the CEO of a company sign the tax return and what effect did that have?
    Sox (sarbanes oxley) was the regulation that required CEOs to sign their public findings (not the tax return), not Dodd-Frank. It also did a bit more than just require attestation by the C staff. The bill was 29,234 words long and generated more than 5000 separate supporting regulations (all of this is in their article's supporting database: http://regdata.mercatus.org/?type=word_count&regulator[]=0). SOX also focused heavily on ensuring that Boards were independent of the companies they oversaw, which had nothing to do with the Enron scandal that generated the regulation (their board was already in compliance with 62% independence). SOX alone generates thousands of pages of compliance data annually from all public companies, the estimated cost of which is in the billions of dollars (http://www.cato.org/publications/spe...10-years-later).


    As for questions of how ponderous these regulations were, you can see in the link above that more than 30,000,000 words added to regulations in the last twenty years. Simply ensuring compliance with understanding those regulations would be extremely costly, think of the amount of staff that is required by HR just to comply with these kinds of regulations reporting requirements. Let alone the actual impact of the rules that are set.



    Regardless, you also seem to be laboring under the false assumption GP was under. You seem to think this article was about regulations being harmful. You would agree, I hope, that given the actual data linked above, that we can at least say that it wasn't deregulation causing the financial crises since no such deregulation seems to have occurred.


    Quote Originally Posted by CliveStaples View Post
    Tentatively, I find a few things problematic about this analysis:
    Sorry for the apparent obtuseness, which analysis are you specifically referring to? At first I thought you meant the reference in the OP due to the blue/salmon reference (which I agree with), but (1) and (2) don't seem to have anything to do with their work. Any clarification would be appreciated.
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  8. #8
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Sorry for the apparent obtuseness, which analysis are you specifically referring to? At first I thought you meant the reference in the OP due to the blue/salmon reference (which I agree with), but (1) and (2) don't seem to have anything to do with their work. Any clarification would be appreciated.
    (1) and (2) are referring to their work, yes.

    (1) is relevant to their work because their work doesn't provide evidence that additional regulation would not have blunted the effect of the crises. If additional regulation would have blunted the effect of the crises, then it is sensible to attribute at least some of the effect of the crises to the lack of such regulation.

    (2) is relevant to their work because they are analyzing the number of restrictions, not the nature or kind of the restriction, nor the weight of the restriction.
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  9. #9
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by Squatch347 View Post

    Sox (sarbanes oxley) was the regulation that required CEOs to sign their public findings (not the tax return), not Dodd-Frank. It also did a bit more than just require attestation by the C staff. The bill was 29,234 words long and generated more than 5000 separate supporting regulations (all of this is in their article's supporting database: http://regdata.mercatus.org/?type=word_count®ulator[]=0). SOX also focused heavily on ensuring that Boards were independent of the companies they oversaw, which had nothing to do with the Enron scandal that generated the regulation (their board was already in compliance with 62% independence). SOX alone generates thousands of pages of compliance data annually from all public companies, the estimated cost of which is in the billions of dollars (http://www.cato.org/publications/spe...10-years-later).

    As for questions of how ponderous these regulations were, you can see in the link above that more than 30,000,000 words added to regulations in the last twenty years. Simply ensuring compliance with understanding those regulations would be extremely costly, think of the amount of staff that is required by HR just to comply with these kinds of regulations reporting requirements. Let alone the actual impact of the rules that are set.

    Regardless, you also seem to be laboring under the false assumption GP was under. You seem to think this article was about regulations being harmful. You would agree, I hope, that given the actual data linked above, that we can at least say that it wasn't deregulation causing the financial crises since no such deregulation seems to have occurred.
    The data above is exactly the problem I have. You have shown there was regulation, but if those regulations were neutral or not effective then the effect would have been the same.

    Having the CEO sign the tax return seems pretty vanilla to me. I mean what was the intent of that? To put the fear of God into the CEO that he better make sure he's running a tight ship?

    "SEC. 1001. SENSE OF THE SENATE REGARDING THE SIGNING OF CORPORATE
    TAX RETURNS BY CHIEF EXECUTIVE OFFICERS.
    It is the sense of the Senate that the Federal income tax
    return of a corporation should be signed by the chief executive
    officer of such corporation." https://www.sec.gov/about/laws/soa2002.pdf


    heehee and it's "should be signed"...weak to say the least.
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  10. #10
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    I think we might need to take a step back, because there seems to be a bit of confusion on what exactly this study is about. The premise of this study is something like:

    The hypothesis that financial deregulation led the 2008 financial crises should be rejected


    I contrast this with what seems to me to be the tacit understanding of it by others here:

    Regulations did not prevent the financial crises.



    Those are two very different arguments with different implications.

    It would be a bit like the difference between saying "You can't say that stopping smoking is what caused you cancer, because you never stopped or even reduced smoking" and "Your increase in smoking caused your cancer."

    This study is a rebuttal of an argument often referenced in pop-economics (hence why it is relatively short) rather than a full blown analysis of the regulatory causes or lack thereof for the financial crises.


    Perhaps I am misunderstanding the responses here, if so please correct me. I just wanted to take a moment and make sure we were on the same page.



    Quote Originally Posted by CliveStaples View Post
    (1) is relevant to their work because their work doesn't provide evidence that additional regulation would not have blunted the effect of the crises. If additional regulation would have blunted the effect of the crises, then it is sensible to attribute at least some of the effect of the crises to the lack of such regulation.
    Given the explanation above, is it reasonable to assume that (1) no longer applies? I should also clarify that "deregulation" is an action, not a state. They aren't saying "a state of relatively lower regulation did not cause the financial crises" or "a state of relatively higher regulation would not have caused the financial crises." They are saying "the action of lowering regulations on the financial industry is not a causative factor in the crises because no such act took place, rather the act of increasing regulation took place."


    Quote Originally Posted by Clive
    (2) is relevant to their work because they are analyzing the number of restrictions, not the nature or kind of the restriction, nor the weight of the restriction.
    Well, that isn't exactly the case, the database they use does measure a rough estimate of regulatory weight, but it really isn't that critical for the argument they are making.

    If I were to say that there were 3 laws in place last year and that now those 3 laws were still in place and there are 10 additional laws, I can conclude that no reduction in the legal code occurred right? Now those 10 might be empty shells and as such maybe no real increase in the code occurred either, but at the very least we can say that no reduction in the code occurred.



    Quote Originally Posted by CowboyX View Post
    You have shown there was regulation, but if those regulations were neutral or not effective then the effect would have been the same.
    1) Did you see the clarification of their argument above? And if so, does that at all change your response?

    2) Small point, you realize that it is two economists with public policy specialties showing this, not me, right?

    3) Let's assume that all the additional regulations were completely empty. That they were just pictures of cats with no legal authority what so ever. We can still say that no deregulation occurred right? Use the example I offered Clive above, If I were to say that there were 3 laws in place last year and that now those 3 laws were still in place and there are 10 additional laws, I can conclude that no reduction in the legal code occurred right? Now those 10 might be empty shells and as such maybe no real increase in the code occurred either, but at the very least we can say that no reduction in the code occurred.


    Quote Originally Posted by Cowboy
    Having the CEO sign the tax return seems pretty vanilla to me. I mean what was the intent of that?
    Well as I pointed out in my last post, the C-Suite (it isn't just he CEO, the COO, CIO, CFO, and usually CCO must also sign attestations) attestation requirement was a tiny, tiny part of SOX. It's primary purpose to shift the legal risk back to the management for their financial statements. Remember that all financial statements are audited by independent auditors. That led to a defense arising by C officers that if there were inaccuracies in those statements it was the auditor's job to catch them. This simply removes that defense by requiring C staff to also attest to their accuracy.


    Quote Originally Posted by Cowboy
    heehee and it's "should be signed"
    Do you know what "sense of the Senate" means? It is a legal finding concerning current legal code not an additional regulation. That paragraph is saying "the Senate believes CEOs are required to sign their tax returns." SOX did not initiate or enhance this requirement. And, as I've said a couple of times, this is only about 1/10th of 1% of the regulation. You are literally only talking about 29 words out of 29,234.
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by Squatch347 View Post
    I think we might need to take a step back, because there seems to be a bit of confusion on what exactly this study is about. The premise of this study is something like:

    The hypothesis that financial deregulation led the 2008 financial crises should be rejected


    I contrast this with what seems to me to be the tacit understanding of it by others here:

    Regulations did not prevent the financial crises.



    Those are two very different arguments with different implications. [...] This study is a rebuttal of an argument often referenced in pop-economics (hence why it is relatively short) rather than a full blown analysis of the regulatory causes or lack thereof for the financial crises.
    If this is the exact argument that you want to make, then there's really no point in having this conversation. You're taking an incredibly narrow, uncharitable, and myopic interpretation of the "pop-economics argument," and it becomes easy to defeat because of its triteness.


    To clarify: Firstly, most people that I know are concerned that the "lack of regulation lead to the financial collapse", which specifically includes Clive's questions regarding the kinds of regulations that should be in place, their quality, et cetera. Secondly, if they do say "deregulating" it's more likely that they referencing a specific deregulation (i.e. failing to maintain Glass-Steagal) --or they simple misspoke. But I can nearly guarantee you that what they did not mean was:

    "The increased deregulation of every, any, and all forms of financial regulation, including regulations that manifestly have nothing to do the financial collapse, lead to the financial collapse."

    I suspect the reason why no one has defended this interpretation is because no one is stupid enough to actually hold to this interpretation. If your main point is that this interpretation of people's concerns about financial regulations is wrong, then by all means keeping swinging until you cleave the strawman in two, Squatch, but it really doesn't address the host of people's concerns over the alleged lack of specific regulations (in terms of both legality and enforcement) for Wallstreet. Maybe I'm wrong, maybe there are people stupid enough to think that the narrow, myopic interpretation you're rebutting is true --but for the rest of us, our concerns regarding the failure to regulate Wallstreet remain wholly unaddressed by this study.
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by Squatch347 View Post
    Now those 10 might be empty shells and as such maybe no real increase in the code occurred either, but at the very least we can say that no reduction in the code occurred.
    Perhaps, I've already agreed with your data and perhaps I might agree that those regulations made it more costly on businesses - having a CEO sign the tax return is so (*sniff*) ponderous - what I don't see is that those regulations that were in place were effective (whether intentional or not - intentional would be better) at preventing bad and/or dangerously risky behavior.

    ---------- Post added at 12:38 PM ---------- Previous post was at 12:34 PM ----------

    Quote Originally Posted by Squatch347 View Post

    Do you know what "sense of the Senate" means? It is a legal finding concerning current legal code not an additional regulation. That paragraph is saying "the Senate believes CEOs are required to sign their tax returns." SOX did not initiate or enhance this requirement. And, as I've said a couple of times, this is only about 1/10th of 1% of the regulation. You are literally only talking about 29 words out of 29,234.
    I found those 29 words in under 5 minutes. I agree with your data. Isn't the next step to evaluate the regulations for effectiveness? A bunch of regulations written by lobbyists and pushed through by their puppet politicians that sound good but do nothing is the same as nothing.
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by GoldPhoenix View Post
    If this is the exact argument that you want to make, then there's really no point in having this conversation. You're taking an incredibly narrow, uncharitable, and myopic interpretation of the "pop-economics argument," and it becomes easy to defeat because of its triteness.
    A couple of points here. One this is not my 'position' it is the position of two trained and practicing economists which I came across by reading a blog run by two other trained and practicing economists. Obviously these professionals in the field thought it was important enough to warrant not only study, but discussion concerning that study.

    Two, it is interesting that you assume that no one would make the argument because your personal social circle doesn't seem to make it. Clearly there are arguments that happen outside of your particular circle. It is even odder because you respond to Clive in a thread referenced below where he references exactly that argument, noting you agree (with a series of points, not just that).


    Quote Originally Posted by GP
    I suspect the reason why no one has defended this interpretation is because no one is stupid enough to actually hold to this interpretation.
    Oh?

    [First things first, before you fly off the handle about how they are talking about specific regulations, you'll note that not only does the original study mention and refute those exact regulations, but that the study also has data specifically restricted to commodities and securities, the relevant area of regulation. Their study wasn't about some insanely broad set of regulations, it was about first refuting the usual examples cited and then noting that regulations that affect the relevant areas of the players in the crises rose, not fell during that period.]



    Nobel prize winning economist Paul Krugman holds that view:

    “O.K., the other obvious culprit is financial deregulation”
    http://www.nytimes.com/2013/08/23/op...f-bubbles.html
    And the same argument here:
    http://www.nytimes.com/2009/06/01/op...01krugman.html


    Tyler Cowan, not exactly a small figure in economics circles felt it a widespread enough belief to write a well sourced blog response. You’ll note he cites where much of the claim has come from.


    Did the Gramm-Leach-Bliley Act cause the housing bubble?

    No. That is one common myth among the progressive left. Because it involves financial deregulation and the unpopular Phil Gramm, the Act is vilified and assumed to be part of a broader chain of evil events. Here are some of the articles which promulgate the myth that the Act caused or helped cause the housing bubble. One version of the claim originates with Robert Kuttner, but if you read his article (and the others) you’ll see there’s not much to the charge. Kuttner doesn’t do more than paint the Act as part of the general trend of allowing financial conflicts of interest.
    Most of all, the Act enabled financial diversification and thus it paved the way for a number of mergers. Citigroup became what it is today, for instance, because of the Act. Add Shearson and Primerica to the list. So far in the crisis times the diversification has done considerably more good than harm. Most importantly, GLB made it possible for JP Morgan to buy Bear Stearns and for Bank of America to buy Merrill Lynch. It’s why Wachovia can consider a bid for Morgan Stanley. Wince all you want, but the reality is that we all owe a big thanks to Phil Gramm and others for pushing this legislation. Brad DeLong recognizes this and hail to him. Megan McArdle also exonerates the repeal of Glass-Steagall.
    Here is a good critique of GLB, on the grounds that it may extend "too big to fail" to too many institutions. That may yet happen but not so far.
    The Act had other provisions concerning financial privacy.
    Maybe you can blame some conflict of interest problems at Citigroup and Smith Barney on the Act. But again that’s not the mortgage crisis or the housing bubble and furthermore those problems have been minor in scale. Ex-worker has a very sensible comment. The most irresponsible financial firms were not, in general, owned by commercial banks. Here’s lots of informed detail on GLB and the bank failure process. Here is another good article on how GLB didn’t actually change Glass-Steagall that much.
    Here’s a Paul Krugman post on GLB; he attacks Phil Gramm but he doesn’t explain the mechanism by which GLB did so much harm. The linked article has no punch on this score either, although you will learn that Barack Obama has scapegoated GLB, again without a good story much less a true story.

    http://marginalrevolution.com/margin....njCtfmCd.dpuf

    Factcheck.org which oddly agrees that there is no basis for the claim also cites numerous pundits, politicians, and economists as having made the claim. http://www.factcheck.org/2008/10/who...onomic-crisis/


    The NYT cited this argument in some of its initial reporting on the crises:
    http://www.nytimes.com/2008/09/28/ma...gewanted=print





    From Think Progress:
    In 1999, Congress passed the Gramm-Leach-Bliley Act, which abolished “all of the significant rules put in place at the time of the Great Depression designed to prevent a repeat.” Specifically, this act “destroyed the Depression-era barrier to the merger of stockbrokers, banks and insurance companies.”
    Yesterday, a group of economists, including Nobel Prize winner Joseph Stiglitz, slammed Gramm for having a “mentality that doesn’t understand the nature of systemic risks in financial systems,” and said that his bill helped create the current financial turmoil:
    http://thinkprogress.org/economy/200...s-blame-gramm/




    Wiki makes the argument, citing sources: https://en.wikipedia.org/wiki/Gramm%...ct#Controversy

    The NYT cites a democrat Congressional commission finding that deregulation was a main driver of the collapse: http://www.nytimes.com/2011/01/26/bu...26inquiry.html

    HuffPo cites Deregulation as a driver in the financial crisis: http://www.huffingtonpost.com/robert...a_b_82639.html

    The Atlantic, while disagreeing, cites several sources as making that claim and even goes so far as calling it a widespread narrative: http://www.theatlantic.com/business/...-crisis/26880/

    Clive made that point here:
    http://www.onlinedebate.net/forums/s...l=1#post318071
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post370764
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post334607
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post103732

    Mithran said that “most economists agree that de-regulation is mostly at fault here.”
    http://www.onlinedebate.net/forums/s...l=1#post335956

    and:
    My Argument:

    conservatism=deregulation=cause of failure

    Not rocket science here.
    Same thread

    JJ makes that exact argument in this post, and then again in the thread: http://www.onlinedebate.net/forums/s...l=1#post520589
    And here:
    http://www.onlinedebate.net/forums/s...-burning-suns/
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post520212

    Zorak made that argument in this thread: http://www.onlinedebate.net/forums/s...et-orientation
    And here:
    http://www.onlinedebate.net/forums/s...l=1#post487933
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post338101
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post514628
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post393058
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post428364
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post500953

    Cowboy made that argument here: http://www.onlinedebate.net/forums/s...-burning-suns/

    Manc used that as his argument here:
    http://www.onlinedebate.net/forums/s...sis-Inside-Job
    and here:
    http://www.onlinedebate.net/forums/s...Argument/page2

    cdubs made that argument here (thegreenape seconds him) and he is a conservative:
    http://www.onlinedebate.net/forums/s...l=1#post388701
    and here
    http://www.onlinedebate.net/forums/s...-FAILURE/page2
    and here
    http://www.onlinedebate.net/forums/s...t-FAILS!/page2

    Sig referenced that argument here:
    http://www.onlinedebate.net/forums/s...287-US-Economy

    Booger here:
    http://www.onlinedebate.net/forums/s...l=1#post369600
    and here:
    http://www.onlinedebate.net/forums/s...l=1#post103705

    cstamford references others using the argument and provides sources here:
    http://www.onlinedebate.net/forums/s...l=1#post480961

    KingoftheEast used it here:
    http://www.onlinedebate.net/forums/s...l=1#post454453

    Sharmak makes the argument here:
    http://www.onlinedebate.net/forums/s...l=1#post449357

    Mister Guy makes it here:
    http://www.onlinedebate.net/forums/s...l=1#post383944




    Quote Originally Posted by CowboyX View Post
    Perhaps, I've already agreed with your data and perhaps I might agree that those regulations made it more costly on businesses - having a CEO sign the tax return is so (*sniff*) ponderous - what I don't see is that those regulations that were in place were effective (whether intentional or not - intentional would be better) at preventing bad and/or dangerously risky behavior.
    Cowboy, where did I say anything about those regulations being more costly on business? Or made any kind of argument about them preventing bad or dangerous behavior? Please quote the relevant text where you think I made any kind of argument like this.

    Did you even read the clarification in the last post?

    Seriously, what are you talking about? Your response seems to be wholly unrelated to the argument at hand.
    "Suffering lies not with inequality, but with dependence." -Voltaire
    "Fallacies do not cease to be fallacies because they become fashions.” -G.K. Chesterton
    Also, if you think I've overlooked your post please shoot me a PM, I'm not intentionally ignoring you.


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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by Squatch
    [First things first, before you fly off the handle about how they are talking about specific regulations, you'll note that not only does the original study mention and refute those exact regulations, but that the study also has data specifically restricted to commodities and securities, the relevant area of regulation. Their study wasn't about some insanely broad set of regulations, it was about first refuting the usual examples cited and then noting that regulations that affect the relevant areas of the players in the crises rose, not fell during that period.]
    I'll stop my respond here, because everything the OP rested on, everything the rest of your post assumes, etc, are all predicated on this point actually being true, which it isn't. No, Squatch, not they didn't . Here's the whole paper, relevant parts bolded:

    Using the Mercatus Center at George Mason University’s RegData, we find that between 1997 and 2008 the number of financial regulatory restrictions in the Code of Federal Regulations (CFR) rose from approximately 40,286 restrictions to 47,494—an increase of 17.9 percent. Regulatory restrictions in Title 12 of the CFR—which regulates banking—increased 18.2 percent while the number of restrictions in Title 17—which regulates commodity futures and securities markets—increased 17.4 percent.

    RegData measures regulatory restrictions by counting the number of restrictive words and phrases—such as “may not,” “must,” “shall,” “prohibited,” and “required”—in each title of the CFR. Developed by Patrick A. McLaughlin and Omar Al-Ubaydli, RegData is computer-based and thus only able to calculate regulatory restrictions for 1997 and subsequent years because electronic copies of the complete, annual CFR are publicly available from the Government Printing Office for only that time period.

    Total regulatory restrictions pertaining to the financial services sector grew every year between 1999 and 2008, increasing 23 percent during this time. The Patriot Act, the Sarbanes-Oxley Act, and Regulation NMS all contributed to this growth. The repeal of parts of the Glass-Steagall Act via the Gramm-Leach-Bliley Act did not result in noticeable deregulation of the financial services sector. Nor did the Commodity Futures Modernization Act facilitate overall financial deregulation. Not even the Financial Services Regulatory Relief Act of 2006, legislation intended to decrease regulatory burdens on the financial industry, reversed the ever-growing burden of regulatory restrictions faced by the financial services sector in the years leading up to the financial crisis.

    Net decreases for Title 12 regulatory restrictions between 1997 and 1999 largely reflect an effort to streamline regulatory text. Only the FDIC portion (volume 4) of Title 12 experienced a significant decrease in pages between 1997 and 1998, and it was almost entirely isolated within 12 C.F.R. § 335, which was shortened from 136 to 7 pages in an effort to streamline FDIC regulations with pertinent SEC Securities Exchange Act regulations. Similarly, the comparatively small decrease in overall regulatory restrictions in Title 12 between 1998 and 1999 is in large part attributable to the Federal Reserve’s 1999 consolidation of Regulation G—which pertained to nonbanks’ extension of leverage for the purpose of purchasing certain securities—with Regulation U, which was revised to be applicable to both banks’ and nonbanks’ extension of leverage. Without this consolidation, Title 12 pages would have increased between 1998 and 1999. Neither of these episodes had any relation whatsoever to Gramm-Leach-Bliley or the Commodity Futures Modernization Act.

    As we show in this analysis, financial regulatory restrictions increased 17.9 percent in the years leading up to the crisis. Without the streamlining efforts of the late 1990s—which reduced duplicative regulatory text and were unrelated to the acts of Congress typically blamed for alleged deregulation—this figure would likely be even higher. In Dodd-Frank: What it Does and Why it’s Flawed, we used the RegData methodology to estimate that Dodd-Frank will cause a 26 percent increase in financial regulatory restrictions. Policymakers should reexamine the presumption that Dodd-Frank’s substantial regulatory restrictions are necessary to offset previous deregulation of the financial services sector. On net, RegData shows that no such deregulation occurred. In fact, the financial sector was increasingly regulated over the decade leading up to the financial crisis.


    In other words, they're talking about every and any regulation regarding banking and commodities/securities as a whole. That's your version of being "specific"? You're in the financial industry. You probably understand the breadth, quality, and kinds of different regulations that exist in these massive, huge, and extraordinarily large markets, yeah? Are the words "may not," "must," "shall," "prohibited," and "required" broadly in the entire field of banking as well as securities/future commodities equivalent to specific examples of deregulation or a discussion of a specific types of regulation that should be implemented? This paper is an entire strawman of what people (e.g. Krugman who actually has listed specific examples of lacking regulation right after the financial crisis) actually mean when they say things like "Deregulation contributed to the 2008 financial collapse."


    Do you honestly believe that they mean that all and every kind of deregulation in the entire field of banking/derivatives, regardless of how it's related to the financial collapse, are responsible for the 2008 financial collapse? When someone tells you that a dam broke and it killed millions of people, and maybe someone should have worked on a specific area of the dam, do you object: "Oh no, the dam didn't cause this! Look at how much of the dam there is. And we made the dam bigger, too! Can't you see how big the dam is? Most of the dam was already there, irrelevantly doing nothing. And then just somehow the water came through, I don't know how, but it's clear that adding to the top of the dam didn't stop the dam from breaking. So why are people saying that we should have fixed the dam and bigger? Don't you see, that doesn't make any sense!" Really?
    Last edited by GoldPhoenix; July 22nd, 2015 at 04:07 PM.

  15. #15
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by GoldPhoenix View Post
    I'll stop my respond here, because everything the OP rested on, everything the rest of your post assumes, etc, are all predicated on this point actually being true, which it isn't. No, Squatch, not they didn't . Here's the whole paper, relevant parts bolded:
    Did you just randomly bold some text or did you read it first?

    Perhaps to the section where they talk about the fact that the only regulatory provisions to reduce in size did not reduce in scope?

    Total regulatory restrictions pertaining to the financial services sector grew every year between 1999 and 2008, increasing 23 percent during this time. The Patriot Act, the Sarbanes-Oxley Act, and Regulation NMS all contributed to this growth. The repeal of parts of the Glass-Steagall Act via the Gramm-Leach-Bliley Act did not result in noticeable deregulation of the financial services sector. Nor did the Commodity Futures Modernization Act facilitate overall financial deregulation. Not even the Financial Services Regulatory Relief Act of 2006, legislation intended to decrease regulatory burdens on the financial industry, reversed the ever-growing burden of regulatory restrictions faced by the financial services sector in the years leading up to the financial crisis.

    Net decreases for Title 12 regulatory restrictions between 1997 and 1999 largely reflect an effort to streamline regulatory text. Only the FDIC portion (volume 4) of Title 12 experienced a significant decrease in pages between 1997 and 1998, and it was almost entirely isolated within 12 C.F.R. § 335, which was shortened from 136 to 7 pages in an effort to streamline FDIC regulations with pertinent SEC Securities Exchange Act regulations. Similarly, the comparatively small decrease in overall regulatory restrictions in Title 12 between 1998 and 1999 is in large part attributable to the Federal Reserve’s 1999 consolidation of Regulation G—which pertained to nonbanks’ extension of leverage for the purpose of purchasing certain securities—with Regulation U, which was revised to be applicable to both banks’ and nonbanks’ extension of leverage. Without this consolidation, Title 12 pages would have increased between 1998 and 1999.


    They are, quite literally listing out the exact sections and titles that saw decreases in regulatory work length and then analyzing their effect, ie no decrease in scope.

    Quote Originally Posted by GP
    When someone tells you that a dam broke and it killed millions of people, and maybe someone should have worked on a specific area of the dam, do you object: "Oh no, the dam didn't cause this! Look at how much of the dam there is. And we made the dam bigger, too! Can't you see how big the dam is? Most of the dam was already there, irrelevantly doing nothing. And then just somehow the water came through, I don't know how, but it's clear that adding to the top of the dam didn't stop the dam from breaking. So why are people saying that we should have fixed the dam and bigger? Don't you see, that doesn't make any sense!" Really?
    GP, take a breath. Increasing your font size is as mature as responding in all caps with lots of exclamation points. You don't need to make your text size bigger as if that makes your argument better and then emote all over the thread.

    Krugman, as well as every other source I linked was specifically referring to the loss of Glass-Steagal. (I should note that your Krugman link has literally nothing to do with this debate, it only goes to reinforce that you are still arguing against a "regulation is bad" argument by citing Mr. Krugman. That link is Krugman's passionate attempt to get people to re-embrace Keynes, and has literally nothing to do with regulatory effects on the financial market.)

    Now, take a look at the OP. Did they cover Glass Steagal? Yep, they did in the section I quoted to you. They specifically are pointing out that the repeal of a section of that act had no effect on the regulatory burden of the industry (because virtually no regulations changed when the law was passed, the existing regulations were not reduced, or removed. They specifically note that the only reduction in regulatory code occurred via two, separate, legislative acts that didn't decrease burden, only reduced redundant language.
    "Suffering lies not with inequality, but with dependence." -Voltaire
    "Fallacies do not cease to be fallacies because they become fashions.” -G.K. Chesterton
    Also, if you think I've overlooked your post please shoot me a PM, I'm not intentionally ignoring you.


  16. #16
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by Squatch347 View Post

    Cowboy, where did I say anything about those regulations being more costly on business? Or made any kind of argument about them preventing bad or dangerous behavior? Please quote the relevant text where you think I made any kind of argument like this.

    Did you even read the clarification in the last post?

    Seriously, what are you talking about? Your response seems to be wholly unrelated to the argument at hand.

    True, you've said nothing about the regulations effects which is what I'm asking about. I'll agree that you've proved your point that there was, numerically, more regulations, but if those regulations did nothing of consequence then how is saying there was no regulation wrong. Maybe semantically.

    It would seem like the next logical step for your researchers to look into.

    After that, I'd ask why were there regulations that were ineffective? Were there good regulations that weren't enforced or were there paper tigers written by special interests?
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    Re: Evaluating Evidence for the Claim that Deregulation Led to the Financial Crises

    Quote Originally Posted by CowboyX View Post
    It would seem like the next logical step for your researchers to look into.
    Well that wasn't exactly the point I was making. The point I was making is the the broad claim (or any of its specific sub-variants) that deregulation is what caused the crises is empirically false.

    Remember that they were specifically dealing with a hypothesis commonly forward by Mr. Krugman amongst others (as noted in my penultimate reply to GP above). That the removal of regulatory code is what caused the crises. Now, that hypothesis takes several flavors, one is the alteration of Glass-Steagal (Which they directly address), the other is the more general trend in the "deregulation" that happened in the late 90s.

    Their study makes two basic points:

    1) Glass Steagal's alteration did not directly affect the regulatory code. IE agencies didn't remove regulations because of it.

    2) Of the reduction that did occur to regulatory code, none of it had any impact upon the areas of the economy that caused the crises.

    Quote Originally Posted by Cowboy
    if those regulations did nothing of consequence then how is saying there was no regulation wrong.
    I don't understand this section. Could you elaborate?

    Quote Originally Posted by Cowboy
    After that, I'd ask why were there regulations that were ineffective? Were there good regulations that weren't enforced or were there paper tigers written by special interests?
    Well that is, essentially, the entire field of public choice theory and public choice economics and a bit too broad for any single study. I don't know either of these authors, but I do know several at George Mason (where this was produced) and I would hazard to argue (in a much more complex argument that is outside of the scope of this thread, though I would be happy to start one on that subject if you were inclined) that due to the emergent properties inherent in any economic activity that regulatory code cannot produce predictable outcomes. They would also likely point out that the economic advantage that arises from regulatory changes is always best captured by those most able to do so, which in finance regulation is always the bigger banks or politically connected funds.


    They would probably also note the inherent conflict in the revolving door SEC concept where the regulators are generally former bank or investment firm employees who then return to better paying versions of that job inside those banks after a few years. That is an intractable problem for any government agency regulating a complex field because the only people who really understand the field are the ones working in it. But the ones working in it are, by definition, not impartial.
    "Suffering lies not with inequality, but with dependence." -Voltaire
    "Fallacies do not cease to be fallacies because they become fashions.” -G.K. Chesterton
    Also, if you think I've overlooked your post please shoot me a PM, I'm not intentionally ignoring you.


 

 

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