Out of Control Policy Blog

Myth: More Regulation Would Have Stopped the Crisis

Arnold Kling has a great piece in The American on Wednesday breaking down regulation myths of the financial crisis. The fifth myth he addresses is the claim that tougher regulation would have prevented the crisis:

There is a myth that financial firms were like teenagers who started a terrible fire because of a lack of adult supervision. In fact, Congress and regulators were doing the equivalent of handing out matches, gasoline, and newspapers.

Housing policy was obsessed with increasing home purchases. This was pushed to the point where, given the lack of any down payment, the term “home ownership” is probably a misnomer. If the goal was home ownership, then the actual result was speculation and indebtedness.

The easiest way to have prevented the crisis would have been to discourage, rather than encourage, the trend toward ever lower down payments on home purchases. Maintaining a requirement for a reasonable down payment would have dampened the speculative mania that drove house prices to unsustainable levels. It would have reduced the number of mortgage defaults.

Read the full piece and the realities behind regulation myths here.

Also, I broke down the different legislative pieces of degregulation from the past 30 years—all three of them—in this piece for Reason Online back in June.

Anthony Randazzo is Director of Economic Research

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