Paul L. Caron

Sunday, December 4, 2011

Johnston: Income Inequality Increases as Bank Regulation, Prosecutions Decrease

Reuters, The Taxpayers’ Burden, by David Cay Johnston:

The accompanying graphic shows a fascinating correlation. In the years before New Deal regulation of banks and after the easing of regulations began in 1980, bank failures were quite high. So was income inequality.

But from about 1933, when the federal regulation of banks was put in place, to 1980, when Chicago School theories began to shape policy, bank failures were rare. During those years incomes were much more equal, with a prosperous middle class. ...

Correlation is not causality, but the fact that income inequality rose as banking regulations were eased makes sense. Freed of restraints, banks got into all sorts of activities that generated fees and saddled clients with high-interest debt. And once banks could collect fees for mortgages without having to worry about repayment — because the mortgages were sold off by Wall Street — the crucial link between reward and responsibility was severed.

With loosened financial regulation it would seem smart to increase law enforcement. Instead, enforcement was cut, as the chart from Syracuse University’s Transactional Records Access Clearinghouse shows. Based on Justice Department internal reports, it shows criminal prosecutions involving financial firms down sharply since fiscal 1999.

These findings about bank failures, income inequality and lack of prosecutions all take us back to the coordinated attempt by the central banks of the United States, Britain, Canada, the European Union, Japan and Switzerland to delay the day of reckoning on European debt. ... Given the revolving doors that allow the financial class to move smoothly between government, central banks and financial firms throughout the modern world, and how those in power in all of these places have invested their reputations in Chicago School theories, my educated guess is that taxpayers will be stuck with the costs. Let’s hope I am wrong.

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The role of banking deregulation on income inequality is minimal. Every time I read one of Johnston's ridiculous columns, I can't help but think how he comes up with this insane crap. TaxProf should just stop giving him coverage, especially after his NewsCorp debacle where he even lied during his excuse.

But for those who are unfamiliar with Johnston, let me summarize his strategy: Find something bad that has happened and find some conservative policy that is correlated with it. And find something good that has happened and find some liberal policy that is correlated with it.

It's basically the same strategy as the Wall Street Journal editorial board, expect in reverse.

Posted by: AZ | Dec 4, 2011 3:42:19 PM

Is too bad global temperature data has been less accommodating in the last decade and a half; otherwise rising temperatures could have also been added to the causal set driving inequality. But wait, is global warming also a by product of bank misregulation. (Ps. Anyone who has ever worked in finance knows that it was not lack of regulation that failed, it was bad regulation).

Posted by: MG | Dec 5, 2011 5:05:55 AM

The income and wealth of the top few % is very tightly tied to the performance of the markets.

The author of this ridiculous article might make a case that heavy regulation can depress markets, and thus high earner wages. But I'm sure he'd be uncomfortable coming right out and stating that regulation kills markets.

But this moronic assertion that bank deregulation directly leads to inequality completely ignores beneficial part in the middle.

Loosing weight causes you to live longer, and if you live longer, your chances of getting cancer increase. Therefore, losing weight causes cancer.

That is what the author is arguing.

What a tool.

Posted by: | Dec 5, 2011 9:07:46 AM