Is deregulation the problem?

E.J. Dionne:

The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades.

Since the Reagan years, free market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing.

You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism."

The old script is in rewrite. "We are in a worldwide crisis now because of excessive deregulation," Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, said in an interview.

He notes that in 1999 when Congress replaced the New Deal-era Glass-Steagall Act with a looser set of banking rules, "we let investment banks get into a much wider range of activities without regulation." This helped create the subprime mortgage mess and the cascading calamity in banking.

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The structural problems that created the sub prime mortgage mess had little to do with deregulation. The failure of risk analysis is the primary problem and those who were responsible for that failure have paid a much steeper price than Dionne's victim class.

One of the reasons the risk analysis failed is because of a failure to comprehend the dangers of putting people with a conflict of interest in charge of making the loan decisions. When realtors who don't get paid unless the sale closes are in charge of placing the loans, bad things can happen.

On top of that the standards for determining whether some one could service the debt they were agreeing to, disappeared in large part because liberals were pushing for lenders to make more loans to borrowers with a poor credit history. Don't look for many liberals to take responsibility for that decision. Instead they will try to punish the bankers who were forced into making those loans.