“Any overall discussion of our financial crises should be framed by this question: why do we suffer recurrent, intensifying crises”
He couches one part of his answer in terms of the three ‘Des’:
“The embrace of the three “de’s” by both parties – deregulation, desupervision, and de facto decriminalization – has created ever more criminogenic environments that cause crises to become more severe.
Which is quite true: when times are good the finance industry says ‘look how great this stuff is’ and when things collapse they change their arguments to say ‘we need this stuff to spur recovery.’ Then he notes something that is one of the core themes of Treasure Islands:
“The finance industry in the U.S. and the U.K claims that their nation must win the regulatory “race to the bottom” so that they can out-compete residents of the other financial center.”
Exactly. This has been going on since the mid 1950s, as explored in detail in Treasure Islands (and, more recently and succinctly, by Ronen Palan here.) And, as in Treasure Islands, Black compares the regulatory changes to a ratchet:
“With rare exceptions immediately following fraud epidemics that become scandals, regulatory policy only moves in one direction further loosening restrictions. The more crises these failed anti-regulatory policies create, the looser the regulations become and the more severe the crises become.”
It is nice to see the role of the City of London being aired increasingly in the United States: there’s been a little bit of it about recently, most recently here. I will have a lot more to say on this subject later this year.
One of the most depressing parts of all this is, as he says at the top of the article:
“The worst anti-regulatory travesties in the financial sphere have had broad, bipartisan support.”
Which is exactly what happened in the UK too. In smaller jurisdictions with outsize financial sectors, or tax havens, democratic defences have by and large been entirely overrun by the (frequently criminal) financial sector. This is, once again, the politicians’ common fear which in the U.S. goes like this: ‘don’t regulate us too much or the business will all flow to London.’ Which may be true in itself – but the point is that it is generally the harmful bits are the bits most likely to flow to London, leaving the useful stuff behind. Which is the message that politicians need to get.
Black ends with a note of despair:
“We have trashed a regulatory system that was the envy of the world. It helped bring us prosperity, far greater economic stability, fewer and less severe recessions, and reduced income inequality. It made freer enterprise possible because the regulatory cops on the beat helped limit the Gresham’s dynamic in which bad ethics drives good ethics out of the marketplace. When frauds prosper honest businesses are among the victims. The three de’s have brought us recurrent, intensifying financial crises, the end of any material gains by the middle class, losses for the working class, the expansion of poverty and extreme inequality, and the domination of our political system by crony capitalism.”