James Hamilton, economics professor at the University of California San Diego, says it’s a myth that all the financial woes were caused by deregulation. He says the Federal Reserve did not have significant regulatory authority over investment banks like Lehman Brothers. A major villain was the so-called shadow banking system in which nonbanks (hedge funds, for example) make loans without regulatory supervision.
Regulators didn’t move on the shadow banking system. “Failing to develop new regulatory structures for the new financial arrangements proved to be a terrible policy error,” says Hamilton. “But rather than blame it on a laissez-faire philosophy, it is more constructive to recognize it for what it is — the difficulty in continually adapting the regulatory structure to a changing world.”
Either way, the regulators screwed up. The bankers went bonkers, and the rest of us rushed into bunkers.
But will anything be done? “The odds of any of these changes becoming reality is near 0 percent,” says Welsh. “Both political parties are owned by powerful lobbies” — and Wall Street’s lobbies are among the most potent.