To deregulate or not to deregulate – that is the question

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Let’s take a trip back to the 80s: Arnold Schwarzenegger became a legend, boomboxes were cool and Pac-Man had just arrived. Interestingly too, Britain and America shared similar stories. Both countries were reeling from recession. More importantly, both had recently elected free-market inspired leaders: Thatcher and Reagan.  

To repair their economies, both premiers sought the same remedy:

Deregulation of the financial services.

By cutting regulation, taxes and government intervention, firms could borrow more, take bigger risks and move money around more freely. This would in turn create growth.

Did it work?

To a point.

It’s true that both economies enjoyed a period of growth but they soon returned to recession by the early 90s: Black Wednesday hurt John Major’s economic credibility and an American slump helped push George Bush Snr out of the White House. Some even blame Reagan for the 2007 crisis.

Now let’s roll the clock forward.

Again, America and Britain share similar features: weak economic growth and free marketeer leaders. However, this time the response on how to accelerate growth isn’t aligned.

The UK government has stressed that it isn’t going to do away with European financial regulations, whatever the results of the Brexit negotiations are. Similarly, Mark Carney, Governor of the Bank of England, has warned that deregulation is the wrong answer because we’ll just get a return to the risky behaviour that created the last crash.

Conversely, Trump has promised to “do a big number” on the Dodd-Frank Act, Obama’s signature piece of financial regulation. He thinks it’s strangling America’s financial sector and stunting growth. He’s already taken pot shots by reviewing regulators’ powers and the Volcker Rule which restricts banks from engaging in speculative activity.

So when do we find out who is right?

Probably in the next 5 years.

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