[MCN] The economic impact of deregulation

[Lance Olsen]

Financial Times Sept 12 (13?) 2017

Anyone awake in the 1980s should have known about the dangers in the 2000s
FT columnist Matthew C Klein describes & explains the financial crises of the 1980s and recently 

Excerpts:

Lots of people were supposed to prevent the financial crisis. But while a few warned about the dangers in real time, most policymakers, risk managers, and academics failed in their responsibility to protect the rest of us.
 
After the fact, the common defence was that the crisis was so complex and unusual that it would have been impossible to predict. ... The aggressive form of this argument is that those who were worried during the go-go years of the 2000s were simply perpetual pessimists who had gotten lucky.
 
Their logic collapses when faced with the most obvious parallel to the 2000s boom-bust cycle: the credit boom and subsequent balance sheet recession of 1983-1993. That was a dress rehearsal in miniature for what was to come.
 
In a new paper <http://www.nber.org/papers/w23802>, Atif Mian, Amir Sufi, and Emil Verner present additional evidence to demonstrate that anyone who was aware of what was happening in the 1980s and 1990s should have been spooked by what was happening in the 2000s.

 These booms took the form of greater household borrowing, significantly faster inflation, and a big uptick in the size of the notoriously unproductive construction sector <https://ftalphaville.ft.com/2017/05/25/2189204/more-on-americas-unproductive-homebuilding-sector/>. Rather than encouraging worthwhile investments, easier lending standards only exacerbated the amplitude of the cycle:
 
The policy choices on deregulation, rather than other properties inherent in the various US states, seem to be the main driver.

Perhaps worst of all, the damage to the banking systems of the states that embraced deregulation most aggressively seems to have hit employment in manufacturing and other sectors that should have been insulated from local recessions. 

In other words, ’twas not better to have boomed and busted, rather than never to have boomed at all, since the consequences of the bust were bigger than simply reversing the earlier boom.

The change in credit supply had such a big impact both then and more recently because it’s hard to write down debts without crushing the banking system and hard to cut wages without first firing lots of people. The big increases in debt and the big wage hikes in the boom period couldn’t be reversed without significant pain.

This research is interesting and important, but the basic idea that the cycle of the 1980s and early 1990s was related to changes in credit supply is not new. The big mystery is why the Pollyannas of the 2000s didn’t appreciate the lessons from their youth.

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“The American way of life is not negotiable.”

George H. W. Bush. 1992
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“Consumer expectations of ever-higher living standards were fuelled by more lenient and readily available bank lending, 
…. Social status and identity became closely associated with consumption, in particular with the concept of luxury. 

"Identifying oneself with the good life meant being able to live beyond traditional understandings of basic needs. Debt 
was the price one paid for the joys of being part of a hedonistic consumer culture.”

Kenneth Dyson. The Morality of Debt. Foreign Affairs. May 3, 2015
https://www.foreignaffairs.com/articles/2015-05-03/morality-debt <https://www.foreignaffairs.com/articles/2015-05-03/morality-debt>
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"We are not able even to think adequately about the behavior that is at the annihilating edge."

R. D. Laing
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“Full of recent references and statistics, Harvesting the Biosphere adds to the growing chorus of warnings about 
the current trajectory of human activity on a finite planet, of which climate change is only one dimension. 

“One can quibble with with some assumptions or tweak Smil's calculations, but the bottom line will not change, 
only the time it may take humanity to reach a crisis point.”

Stephen Running. “Approaching the Limits” Science 15 March 2013.

Book review. Harvesting the Biosphere: What we have taken from Nature. by Vaclav Smil .  
MIT Press, Cambridge, MA, 2012. 315 pp. $29, £19.95. ISBN 9780262018562.

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