"The trouble with the world is not that people know too
little, but that they know so many things that aren't
-- attributed to Mark Twain
Easy answers are seldom correct ones. That principle seems to be
at work as the nation struggles to discover the causes of the
financial crisis now rocking the economy. Looking for a simple and
politically convenient villain, many politicians have blamed
deregulation by the Bush Administration.
House Speaker Nancy Pelosi, for instance, stated last month
that "the Bush Administration's eight long years of failed
deregulation policies have resulted in our nation's largest bailout
ever, leaving the American taxpayers on the hook potentially for
billions of dollars." Similarly, presidential candidate Barack
Obama asserted in the second presidential debate that "the biggest
problem in this whole process was the deregulation of the financial
But there is one problem with this answer: Financial services
were not deregulated during the Bush Administration. If there ever
was an "era of deregulation" in the financial world, it ended long
ago. And the changes made then are for the most part
Basic Regulatory Structures Never in
In a literal sense, financial services were never "deregulated,"
nor was there ever a serious attempt to do so. Few analysts have
ever proposed the elimination of the regulatory structures in place
to ensure the soundness and transparency of banks. Simply put, the
job of bank examiner was never threatened.
More typically, of course, the word deregulation has been
used as shorthand to describe the repeal or easing of particular
rules. To the extent there was a heyday of such deregulation, it
was in the 1970s and 1980s. It was at this time that
economists -- and consumer activists -- began to question many
longstanding restrictions on financial services.
The most important such restrictions were rules banning banks
from operating in more than one state. Such rules were largely
eliminated by 1994 through state and federal action. Few observers
lament their passing today, and because regional and nationwide
banks are far better able to balance risk, this "deregulation" has
helped mitigate, rather than contribute to, the instability of the
Gramm-Leach-Bliley and Beyond
The next major "deregulation" of financial services was the
repeal of the Depression-era prohibition on banks engaging in the
securities business. The ban was formally ended by the 1999
Gramm-Leach-Bliley Act, which followed a series of decisions by
regulators easing its impact.
While not without controversy, the net effect of
Gramm-Leach-Bliley has likely been to alleviate rather than further
the current financial crisis.
In fact, President Bill Clinton -- who signed the reform bill into
law -- defended the legislation in a recent interview, saying, "I
don't see that signing that bill had anything to do with the
current crisis. Indeed, one of the things that has helped stabilize
the current situation as much as it has is the purchase of Merrill
Lynch by Bank of America, which was much smoother than it would
have been if I hadn't signed that bill."
In 2000, Congress also passed legislation that, among other
things, clarified that certain kinds of financial instruments were
not regulated by the Commodity Futures Trading Commission (CFTC).
Among these were "credit default swaps," which have played a role
in this year's meltdown. Whether this law constituted
"deregulation" is not clear, since the pre-legislation status of
these instruments was uncertain. Nor is it a given that CFTC
regulation of their trading would have avoided the financial
crisis. In fact, many policymakers, including Clinton Treasury
Secretary Robert Rubin, argued that their regulation would do more
harm than good.
In the nine years since that legislation -- including the eight
years of the Bush presidency -- Congress has enacted no further
legislation easing burdens financial services industry.
Regulatory Agency Trends
But what of the regulatory agencies? Did they pursue a
deregulatory agenda during the Bush Administration? Again, the
answer seems to be no.
In terms of rulemaking -- the promulgation of specific rules by
regulatory agencies -- the Securities and Exchange Commission (SEC)
is by far the most active among agencies in the financial realm.
Based on data from the Government Accountability Office, the SEC
completed 23 proceedings since the beginning of the Bush
Administration that resulted in a substantive and major change
(defined as an economic effect of $100 million or more) in
regulatory burdens. Of those, only eight -- about a third -- lessened
burdens. Perhaps surprisingly, the Bush record in
this regard is actually less deregulatory than that of the Clinton
Administration, which during its second term lessened burdens in
nine out of 20 such rulemaking proceedings.
Other financial agencies have been far less active in making
formal rule changes. The Federal Reserve reports five major
rulemakings in the database since 1996 -- four of which were
deregulatory. The only rule change reported by the Federal Deposit
Insurance Corporation and the Controller of the Currency is the
1997 adoption of new capital reserve standards, an action with
Of course, much of the work of regulators takes place in
day-to-day activities rather than in formal rulemaking activities.
For that reason, it is also helpful to look at the budgets of
These also show little sign of reduced regulatory activity
during the Bush years. The total budget of federal finance and
banking regulators (excluding the SEC) increased from approximately
$2 billion in FY 2000 to almost $2.3 billion in FY 2008 in constant
2000 dollars. The SEC's budget during the same time period jumped
from $357 million in 2000 to a whopping $629 million in 2008.
During the same time period, total staffing at these agencies
remained steady, at close to 16,000.
A False Narrative
In the wake of the financial crisis gripping the nation, it is
tempting to blame "deregulation" for triggering the problem. After
all, if the meltdown were caused by the ill-advised elimination of
necessary rules, the answer would be easy: Restore those rules.
But that storyline is simply not true. Not only was there was
little deregulation of financial services during the Bush years,
but most of the regulatory reforms achieved in earlier years
mitigated, rather than contributed to, the crisis.
This, of course, does not mean that no regulatory changes should
be considered. In the wake of the current crisis, debate over the
scope and method of regulation in financial markets is inevitable
and, in fact, necessary. But this cannot be a debate over returning
to a regulatory Nirvana that never existed. Any new regulatory
system would be just that -- complete with all the uncertainty and
prospects for unintended consequences that define such a system.
Policymakers must not pretend otherwise.
James L. Gattuso is Senior
Research Fellow in Regulatory Policy in the Thomas A. Roe Institute
for Economic Policy Studies at The Heritage Foundation.
Based on the author's individual review of each rulemaking; see GAO
Federal Rules Database at http://www.gao.gov/fedrules/. Totals include
all SEC proceedings, not just those specifically affecting
financial services firms or stock market trading. For an analysis
of rulemaking trends across all agencies, see James L. Gattuso,
"Red Tape Rising: Regulatory Trends in the Bush Years," Heritage
Foundation Backgrounder No. 2116, March 25, 2008, at http://www.heritage.org/research/regulation/bg2116.cfm.
Veronique de Rugy and Melinda Warren, "Regulatory Agency Spending
Reaches New Height: An Analysis of the U.S. Budget for Fiscal Years
2008 and 2009," Weidenbaum Center, Washington University in St.
Louis, and Mercatus Center, George Mason University, August