The Laissez-Faire Scapegoat

Richard Posner blamed the economic crisis on “excessive, ideologically motivated deregulation of banking and finance compounded by lax enforcement of the remaining regulations.”2 “The idea of the all-powerful market which wasn’t to be impeded by any rules or political intervention was a mad one,” observed French President Nicolas Sarkozy, but now “[l]aissez-faire is finished.”3 Sometimes, those repeating the deregulation mantra implicitly admitted it had little substance. “A primary cause of the crisis of 2007–09,” wrote the International Monetary Fund (IMF), “was lax financial regulation in the United States.”4 But just two pages later, the IMF editors admit that financial institutions were far from unregulated: “At the heart of the challenge lies a select set of systemically critical financial conglomerates. These groups, straddling the boundary between the heavily regulated, bank-centric core and the more lightly regulated, nonbank periphery of the system.…”5 So, the commercial banks were “heavily regulated” while the investment banks, hedge funds, and other shadow banks were “more lightly regulated,” or less heavily regulated. Where is the lax financial regulation?