Sep 15 2011

IMF: it was deregulated banking that messed up the world

Posted by: Nick Shaxson in: Thoughts

Lots of defenders of the financial sector love to assert that it was the regulated entities that were most to blame for the subprime mess and its consequences, and the deregulation was just fine and dandy and should be allowed to continue. Well, the IMF has been digging into this question, in its Working Paper series:

We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle. . . . We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states. The macroeconomic consequences of our findings are significant: we show that the market share of these lenders as of 2005 is also a strong predictor of the severity of the housing downturn and subsequent rise in unemployment. Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode.”

OK, it’s just a Working Paper, with the usual proviso that these findings don’t necessarily reflect the IMF’s view, but hey. This is pretty striking.

As Treasure Islands explains, and as you can see here, deregulation in general was significantly a result of offshore business.

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