Paul Krugman is pining for the old days when the banking industry was boring. His analysis is flawed, however, because the New Deal Era regulations were changed, not because of some conspiracy, but because they were dysfunctional in the face of 1970s inflation.
One aspect of the regulations limited what banks could pay out as interest on deposits. In an era when prices are rising 10% a year, a bank paying out 3% can't compete with other investments. It was the Carter Administration (yes, the Carter Administration) that first acted to undo the vaunted New Deal regulations allowing more competition among financial institutions.
The current regulatory environment may not be optimal, but going back to a highly regulated system isn't the panacea that we are being sold.
Monday, April 13, 2009
The following was sent to the Raleigh News & Observer: