Dec 05 2011

US bank failures, regulation, and inequality – in pictures

Posted by: Nick Shaxson in: Thoughts

From David Cay Johnston:

From about 1933, when the federal regulation of banks was put in place, to 1980, when Chicago School theories began to shape policy, bank failures were rare. During those years incomes were much more equal, with a prosperous middle class.

That just about sums it up. Now correlation ain’t causation, as I point out in Treasure Islands when describing the high-regulation, high-tax, high-growth, low-inequality Golden Age of Capitalism in the quarter century or so that started soon after the Second World War. But correlations this strong mean that those advocating low financial regulation and tax cuts for the rich need to work very hard indeed to persuade us that they have a case. And events have, in any, er, event, all but conclusively proved them wrong.

The graph here, I think, speaks loudly. Click to enlarge.

He makes the same point about correlation and causation:

Correlation is not causality, but the fact that income inequality rose as banking regulations were eased makes sense. Freed of restraints, banks got into all sorts of activities that generated fees and saddled clients with high-interest debt. And once banks could collect fees for mortgages without having to worry about repayment — because the mortgages were sold off by Wall Street — the crucial link between reward and responsibility was severed.

Time to ditch all that Horsesh*t Economics and start again.

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