Did Deregulation Cause the Great Recession … Or Monopoly Central Banking?
By Staff News & Analysis - March 07, 2014

Janet Yellen's Nemesis – The Great Moderation … New Fed Chairwoman Janet Yellen has a great task ahead of her. How to combat the results of the Great Moderation, as it was called, that period of low inflation with moderate economic growth that prevailed from 1985 to 2007, according to Paul Krugman. But why, when lots of jobs were created, particularly the 22 million jobs created during Clinton's presidency? – Huffington Post

Dominant Social Theme: The cause of the Great Recession was too much freedom and free markets. Prosperity depends on reregulating the economy.

Free-Market Analysis: Whoops! Harlan Green is a good writer and sophisticated thinker, but his grounding is seemingly Keynesian; thus, this article, which appeared recently in the Huffington Post, drills down to unearth a rich vein of neo-socialist claptrap.

Who is Mr. Green?

Harlan Green has been the 11-year Editor-Publisher of, a weekly syndicated financial wire service that publishes up to 3 weekly columns under the headings: Popular Economics Weekly, Financial FAQs, and The Mortgage Corner.

His mission is to enhance the popular understanding of economic issues. He also publishes the Popular Economics Weekly Blog. Harlan writes a weekly financial column for the Santa Barbara News-Press, is an economic forecaster and teacher of real estate finance. He has a 30-year record of success as a banker and mortgage banker.

Green's mission may be to "enhance popular understanding of economics" but from our point of view what this article mostly does is cast confusion. It builds on a previous article from Paul Krugman (one that Green curiously calls "recent," though from what we can tell it was published in 2010).

Nonetheless, this seems to us to be an important article because it does us the favor of explaining clearly the alternative faux-narrative that will likely be installed in economic textbooks of Western universities (assuming such institutions remain standing).

Let's try to capture Mr. Green's explanation for what happened as simply as possible. It is his contention (replete with numerous references to Krugman) that the proximate cause of the Great Recession was Fed Chairman Alan Greenspan's Great Deregulation.

In order to bring back prosperity (we kid you not) government must step in and furiously "prime the pump" in all sorts of ways. Green is a fan of Janet Yellen because he thinks she will do just this – and avoid too much of the dread "taper" that will offer disinflation or outright deflation if pursued with excessive enthusiasm.

Here's more of this analysis:

So it is Chairwoman Yellen's task to bring growth back to household incomes and the overall economy. She must ignore the maxims and experience of the Great Moderation to do it, however. She must push for more government stimulus programs–whether for infrastructure, education, or Research and Development – to accompany the Fed's efforts to hold down interest rates as long as possible to encourage moderate inflation. And she must not allow those "barbarians" at the Fed's gate who want to reduce its powers to moderate such Great Recessions.

From Green's point of view, central bank attackers like Milton Friedman have been proven wrong. Friedman wanted a "steady state" Fed that would inject money mechanically into the economy without pandering to risky human judgment.

Green is no fan of Greenspan, either, who – he seems to believe – went even farther than Friedman, pushing for radical deregulation of almost every part of the economy.

Finally, there is the present – a dangerous time from Green's point of view because Greenspan's deregulatory emphasis has now been recalibrated and has taken aim not only at the larger economy but at central banking itself.

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From Green's point of view, Janet Yellen is the right person in the right place at the right time. She won't put up with any fashionable nonsense about financial deregulation. She'll ensure that a too-big-to-fail financial industry is supervised by an even bigger government.

So he seems to think, anyway … Anything else, from Green's point of view, is apparently economic suicide. Deregulation is truly that the God That Has Failed. It promises much, but then delivers catastrophe …

Leaving the Federal Reserve to only worry about large cyclical swings, while allowing the markets to largely grow with little regulation or oversight worked too well, in other words. It lulled policy makers into allowing the massive deregulation of financial markets for one, which led to the Great Recession.

And much worse. The result was loss of so much wealth since the Great Recession for the 99 percent that didn't profit from deregulation. The labor market in particular has suffered most from deregulation, with globalization and free trade agreements allowing even highly skilled jobs to flow overseas, while states restrict collective bargaining for government employees and unions.

From the standpoint of market competition, this is a kind of narrative insanity. We are being told bluntly that markets only work when heavily supervised and will fail when more competition is introduced.

This is kind of a reverse Misesian logic that seems to maintain that price discovery is a good deal less important than the regulatory taming of speculation. But in fact, the more regulation you have, the more distortions you have – the more price-fixing, in other words, and price-fixing doesn't work. Not ever. Price discovery is the fundamental product of private markets. Without price discovery, people don't know what to charge for products.

When prices are confused – when economic consequences are suspended – people will cease to support the market. Crops will not be grown. Eggs will not be gathered. Cows will not be milked. Houses will not be sold, etc. But for people like Green, reining in the "excesses" of the markets via regulation is far more important than ensuring credible price discovery.

There is an almost religious zeal to this sort of approach, a Puritan-like approach to money and speculation that takes as a baseline the concept that these activities are wretched to begin with, even sinful.

Green quotes Krugman throughout the article, including jaw-dropping gems like this:

"[The Great Moderation] worked in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too," said Krugman in a recent column. "If we're living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way."

(Did you catch that? "Central banks have been [this Dark Age's] monestaries." Sheesh.)

He adds to the Krugman quote with a follow-up:

"…the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock… Also, sooner or later the barbarians were going to go after the monasteries too; and as the current furor over quantitative easing shows, the invading hordes have arrived."

To repeat: Despite our incredulity, we found this article worth commenting on because Green does us the favor of presenting what the power elite is surely trying to create as a narrative to explain the economic crisis that began in 2008.

We understand quite clearly that what caused the downturn was central bank rate manipulations that kept the easy money flowing. We're even of the opinion that Ben Bernanke precipitated the Great Recession by hiking rates sharply in the mid-2000s and inverting the yield curve. No one has ever grilled Bernanke on this issue that we know of. We hope some day that someone does.

In any event, we now have our narrative bookends assembled. Keynesians will argue it was "deregulation" that created the current economic disaster. Free-market types will argue it was mainly the rate manipulation and money printing of monopoly central banking.

After Thoughts

It seems obvious to us which is the more logical, sophisticated and realistic explanation.

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