Deregulation

[Recycled from 6 August 2004]

I notice that when people talk about "deregulation", often what they are asking for is actually the opposite of deregulation.

My favorite example is still the "deregulation" which led to the collapse of the savings and loan industry in the 1980s.

S&Ls were required to join the government-owned Federal Savings and Loan Insurance Corporation (FSLIC), which insured deposits up to $100,000. FSLIC rules limited the sorts of activities S&Ls could engage in, in order to reduce the corporation's liability.

Logically, the way to deregulate such an industry would be to charter the FSLIC as a private body without taxpayer subsidies, and make membership in it voluntary. A savings and loan whose officers thought they could do better could join with others to form a competing insurance group, or try to buy insurance from an existing insurance company, or even wing it without insurance, so long as investors were fully informed of the risks they were shouldering.

Those of us who actually remember the Reagan years (as opposed to those who simply feel a vague warm fuzzy sensation at the mention of the Great Man's Name) will remember the Reagan version of deregulation: membership in FSLIC was still mandatory, but S&Ls were no longer bound by those pesky rules and could take all the risks they wanted, even to the extent of gambling on currency exchange rates (otherwise known as Wall Street Roulette). Federal regulators even went beyond the requirements of the law, promising depositors that deposits greater thsn $100,000 would be covered, even if they amounted to millions of dollars.

Free of all restrictions and all fears, the officers of many S&Ls behaved as you might expect: they went hog-wild with other people's money, hoping to make billions, and for the most part they failed. S&Ls were bankrupt all over the country.

The FSLIC had nothing like enough money to cover all those losses. Taxpayer money had to make up the difference. And yes, even those million-dollar deposits by corporations were paid off, even though the government had no legal obligation to do so.

That's deregulation the Reagan - Bush - Bush way. We still haven't tried deregulation the deregulation way, which is why I am still not ashamed of having been a member of the Libertarian Party.