on deregulation

These days in class we are discussing supply side policies and we initialy discussed two ways of distinguishing them. One route is to make the distinction between interventionist and pro-market policies and another way is to divide them into policies that are commonly accepted and policies that are considered more controversial which, in my opinion at least, include the 'pro-market' set and industrial policiy.

In discussing 'deregulation' I mentioned that quite a few consider the US banking and financial deregulation of the 1980s as being to a significant extent responsible for the current crisis.

Today, I was reading in Project Syndicate a short article by Hector R. Torres, a former Executive Director of the IMF.

The whole article is of nterest but these paragraphs are especially interesting for us:

Let us now consider the second question – whether the Fund suffered from a mindset that blinded it to the causes of what was happening. As early as August 2005, Raghuram Rajan, the IMF’s Economic Counselor (chief economist) at the time, was warning of weaknesses in the US financial markets. Rajan saw that something potentially dangerous was happening, warning that competition forces were pushing financial markets “to flirt continuously with the limits of illiquidity” and concealing risks from investors in order to outperform competitors.

Perhaps most revealingly, though, Rajan nonetheless optimistically argued that “[d]eregulation has removed artificial barriers preventing entry of new firms, and has encouraged competition between products, institutions, markets, and jurisdictions.” In other words, he clearly believed that regulation created “artificial barriers,” and that “competition between jurisdictions” – that is, between regulators – was to be welcomed.

Such beliefs come naturally to those committed to the view that markets perform better without regulation, and Rajan’s statement is a good illustration of the IMF’s creed at the time. And it was this boundless faith in markets’ self-regulatory capacity that appears to be at the root of the Fund’s failure to find what it was not looking for.

Read the piece here.