Brad DeLong: Confessions of a Financial Deregulator

BDL:

Confessions of a Financial Deregulator, by J. Bradford DeLong, Commentary, Project Syndicate: Back in the late 1990’s, in America at least, two schools of thought pushed for more financial deregulation...

The first school of thought, broadly that of the United States’ Republican Party, was that financial regulation was bad because all regulation was bad. The second, broadly that of the Democratic Party, was somewhat more complicated...  Depression-era restrictions on risk seemed less urgent, given the US Federal Reserve’s proven ability to build firewalls between financial distress and aggregate demand. New ways to borrow and to spread risk seemed to have little downside. More competition for investment-banking oligarchs from commercial bankers and insurance companies with deep pockets seemed likely to reduce the investment banking industry’s unconscionable profits.

It seemed worth trying. It wasn’t.

Analytically, we are still picking through the wreckage of this experiment. ... Moreover, how to restructure the financial system remains unclear. ... And central banks’ failure to regard their primary job to be the stabilization of nominal income – their failure not only to be good Keynesians, but even good monetarists – raises the question of whether central banking itself needs drastic reform. ...

It may even be the case that we ought to return to the much more tightly regulated financial system of the first post-World War II generation. That system served the industrial core well, at least as far as we can tell from the macroeconomic aggregates. We know for certain that our more recent system has not.