Economic Regulation Isn't Storming Back
The credit rescue is Washington's deepest intervention since the 1930s, but don't expect a return to the days of price controls and extreme oversight.
Think that Washington, chastened by the credit meltdown, will reinstate much stronger regulation of the whole U.S. economy? Think again.
Sure, we will see more oversight and supervision in credit markets, and that's a darn good idea.
But don't mistake this for a broad reregulation of the entire economy, as was common before 1980. That's not going to happen, because almost no one -- from Washington to Main Street -- thinks it's a good idea.
Government is not going to put price controls on gasoline, air fares, trucking and freight rates, telephone services, stock brokerage commissions, and interest on savings -- controls which were wisely abolished in the late 1970s and early '80s. That surge of deregulation passed with bipartisan congressional support, led by Presidents Ford and Carter.
As a young adult in the 1970s, I remember when Washington put a lid on the retail price of gasoline. Yes, everyone in America paid about the same price for a gallon of gas at every station -- and everyone waited in the same long lines of cars, for the privilege of buying gas on a designated day of the week. Gasoline price controls created scarcity and rationing, and they were abolished in 1981.
Today, we'll all continue to grumble about wildly fluctuating gas prices, but we'll have all the gas that we need.
As a young newspaper reporter in Washington, I remember covering bizarre hearings at the Civil Aeronautics Board, at which airlines had to ask its permission to begin or end service between two cities or reduce their fares on a route. After these controls were abolished in the early '80s, competition soared in the skies, giving rise to the likes of Southwest and JetBlue. Adjusted for inflation, today's air fares average about 30% lower than 25 years ago, and millions more Americans are able to afford air travel. (Sorry about those crowded planes, with the middle seat always occupied, but that's the flip side of lower fares.)
I remember when the Interstate Commerce Commission told railroads and trucking companies where they could carry what cargos at what price. If a trucker didn't have prior permission to return from Los Angeles to Chicago with a load it had just contracted to carry, it would have to return home empty.
And I remember when AT&T enjoyed a government-sanctioned monopoly on long-distance telephone service, until challenged in court by an upstart called MCI.
In financial services today, we do need more scrutiny by the Comptroller of the Currency and the Federal Reserve of banks' capital reserves, the amount of leverage they're using, the quality of their lending standards, and other measures of banking health. And we need regulators to cast a skeptical eye on exotic financial instruments that no one really understands. Washington did get lax in all this, and it contributed to the credit mess we're in today.
This heightened oversight can be accomplished, however, without fixing bank prices in ways that were common before the Monetary Control Act of 1980.
I remember when every bank paid the same interest rate on deposits, without competition for savings, and charged virtually the same mortgage rates. You selected a bank largely on the convenience of its branch and the quality of the gifts it handed out to open an account. (Remember the giveaway toasters?) And banks were forbidden by regulators to pay interest on checking accounts.
Before 1975, there was no competition among stock brokers in the commissions they charged. It was not uncommon to pay as much as $60 to buy or sell a few shares of stock, compared to today's sub-$10 commissions.
Finally, I remember when President Nixon, incredibly, put the entire U.S. economy -- businesses large and small, in every sector -- under tight wage and prices controls. The year was 1971, and Washington was alarmed by a rate of consumer inflation that had hit -- get this -- a whopping 4%. These price controls became a confusing, ineffective morass of red tape, and they were mercifully abandoned two years later.
My young-adult children -- all highly educated -- talk longingly about the benefits of more regulation in the U.S. economy. But when I ask them if they would favor some of the erstwhile price controls I've just listed, they look at me incredulously. "Of course not," they say. They have grown up under in a freer, more entrepreneurial economy, and they don't know anything else. They are nostalgic for something they never had to live with.
So take with a grain of salt the breathless statements in recent weeks that the credit rescue is Washington's deepest intervention in the economy since the 1930s.
Yes, it is the most significant intervention in credit markets, but it's not even close to the level of routine, daily control that persisted in the broader economy until about 1980.
It's fashionable right now to knock deregulation as a bad idea, without distinguishing between constructive oversight and the dead hand of market control.
The deregulation of key U.S. industries in the '70s and '80s -- such as energy, transportation, telecom, and yes, financial services -- stimulated competition, innovation and economic growth throughout the U.S. economy.
It became a model for similar deregulation around the world. Its legacy is very positive, and we need to remember that, even as we move to strengthen financial oversight.