Deregulation nonsense

Widespread, financial turmoil dominated the recent presidential election in the United States. While both John McCain and Barak Obama had some worthwhile suggestions, there is a worrisome side to the views of the Democrats’ Obama campaign.

The claim that the financial crisis primarily reflects recent trends of deregulation is not only nonsense, but in the long run that simplistic answer could lead to a lot of trouble. Reregulation often will cause untold complications.

No one can or should deny deregulation has been carried too far. Here in Canada deregulation led to the Walkerton toxic water scandal and to the more recent listeriosis outbreak, the contaminated meat flare-up. Throughout North America, deregulation has permitted our financial institutions to engage in some very bad, often corrupt practices. Needless to say, remedies must be forthcoming.

That must be acknowledged, but the real roots of the economic troubles lie in a flawed response to China. Sebastian Mallaby in The Washington Post has written extensively on that subject.

He argues that, “Starting in the 1990s the flood of cheap products from China kept global inflation low, allowing central banks to operate relatively loose monetary policy (that is, very easy credit). But the flip side of China’s export surplus was that China had a capital surplus, too. Chinese savings sloshed into asset markets “around the world, driving up the price of everything from Florida condos to Latin American stocks.”

As a consequence, central banks focused only on consumer prices, which were kept subdued by Chinese exports. Thereafter, the onset of the economic turmoil can be blamed on the U.S. central bank, the Federal Reserve, as it ignored the bubble in the stock market, the absurd, high-tech boom there; then the housing market soared to an unprecedented extent.

Following that, the credit surge ensued, the wild excess in lending to consumers. Several years ago central banks should have clamped down on excessively easy credit and interest rates that remained too low for a long period of time.

From that, all kinds of serious difficulties ensued. Commercial banks as well as hedge funds, faced with low interest rates, rushed into sub-prime mortgages and other junk debt for higher yields. Even the regulated mortgage companies were complicit in those schemes, joined by many others, such as European banks, and fortunately, to a lesser degree by Canadian banks. They have been far more conservative and cautious, nevertheless they participated on a small scale.

Even though financial institutions and generally inadequate regulations have been at fault, they were not the primary triggers for our misfortune. In view of the foolish mortgage lending and other financial shenanigans such as the use of derivatives, credit swaps, and the like, regulations in that industry must be overhauled.

Focusing on deregulation and reregulation would miss the real culprits for our economic troubles. China and less developed nations must not be permitted to sell (dump) their exports on world markets at artificially low prices.


Bruce Whitestone