6 REGULATION AND DEREGULATION IN A TIME OF STAGFLATION: SIEGMUND WARBURG AND THE CITY OF LONDON IN THE 1970s Niall Ferguson
Introduction If journalism is the first draft of history, then the first draft of the history of the 2007–10 financial crisis offers a trenchant verdict. According to commentators such as Paul Krugman, the crisis was primarily the result of a policy of financial deregulation dating back to the 1980s. ‘Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending’, Krugman has written: It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life … It was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable. Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise. These defaults in turn wreaked havoc with a financial system that – also mainly thanks to Reagan-era deregulation – took on too much risk with too little capital.1
In another column, Krugman looked back fondly to a long period of stability after World War II, based on a combination of deposit insurance, which eliminated the threat of bank runs, and strict regulation of bank balance sheets, including both limits on risky lending and limits on leverage, the extent to which banks were allowed to finance investments with borrowed funds.2
This pre-lapsarian age was indeed an Eden: the ‘era of boring banking was also an era of spectacular economic progress’.3 Krugman is by no means a lone voice. Even Richard Posner has recently joined the chorus calling for a restoration of the Glass–Steagall Act, which separated investment banking from commercial banking in the United States.4 It is a truth almost universally acknowledged that this and other measures of deregulation were fervently wished for by bankers, pursued by their lobbyists and enacted by corrupt politicians.5 – 85 –
