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Is This What Deregulation Looks Like?

Thursday, September 17, 2009

It is hard to argue that deregulation of the financial services industry was rampant in Washington when the spending on finance and banking regulatory agencies kept growing so fast. Let’s look at the numbers.

It is often said that deregulation, especially during the last eight years, is one of the central causes of the financial crisis. In large part, this perception stems from the rhetoric of the Republicans in power at the time and their emphasis on the costly burdens that regulation places on business. However, sometimes appearances are just that: appearances. In fact, during the last eight years, federal spending on regulation in the category of finance and banking has gone up notably. This trend is similar to the one we have seen in the last 50 years.

Using data from the Office of Management and Budget, scholars at the Mercatus Center and the Weidenbaum Center have been tracking the expenditures of regulatory agencies and trends in financial regulatory spending, including the federal budget for finance and banking regulations. This data helps us monitor one aspect of the cost of regulations: the direct cost to regulate the economy. While it does not say anything about these agencies’ output or the social costs that regulation imposes on individuals and businesses, we know that if the regulators’ budget increases, the direct cost of running regulatory agencies increases. Also, it is quite reasonable to assume that an increase in regulators’ budget is not a sign of deregulation.

So what does the data say? The graph below shows inflation-adjusted federal spending on finance and banking regulations between 1960 and 2010. As we can see, with very few exceptions, regulatory spending on finance and banking has gone up for the last 50 years from to $190 million in 1960 to $2.3 billion in fiscal 2010. Also, real expenditures for the finance and banking regulation category have risen 45.5 percent from 1990 to 2010, with a 20 percent increase in the last ten years. It rose by 26 percent during President George W. Bush’s administration.


de Rugy chart


Interestingly, because of the current financial crisis, we might have expected that President Obama’s first spending request for regulation of finance and banking would be substantially higher than it turned out. In fiscal 2010, spending on regulation of finance and banking is budgeted to grow 0.8 percent to reach $2.9 billion. That’s after a 7.1 percent increase in 2009. However, we should remember that this number is only a request and that once Congress finishes the budget appropriations process the resulting final outlays will be higher than this original number. Calls for comprehensive reform of the financial regulatory system have intensified this past year. Some of the reforms likely to be considered by Congress include reform of the securitization process, federal regulation of credit rating agencies, creation of a systemic-risk regulator, stricter regulatory oversight of the hedge fund industry, federal regulation of credit default swaps, and consolidation of federal financial regulatory agencies. There is even talk of creating a Consumer Financial Protection Agency.  

It is quite reasonable to assume that an increase in regulators' budget is not the sign of deregulation.

For now, within the federal financial regulation category, the largest-percentage budget increase for fiscal 2010 occurs in the Financial Crimes Enforcement Network (16 percent) while the largest decrease (28.5 percent) is in the Office of Thrift Supervision. After the Securities and Exchange Commission’s budget declined (in real terms) in 2006 and 2007, spending has since increased 15.6 percent. In fiscal 2010, projected SEC spending is $997 million, an increase of 6.9 percent over fiscal 2009. And of course, we can expect that the fiscal 2011 budget will most likely include significant increases.

Overall, it is hard to argue that deregulation of the financial services industry was rampant in Washington when the spending on finance and banking regulatory agencies kept growing so fast.

Veronique de Rugy is senior research fellow at the Mercatus Center.

FURTHER READING: Arnold Kling examines how many regulatory policies contributed to the current financial crisis in "Regulation and the Financial Crisis: Myths and Realities." Complexity has been the bane of our financial system for decades, writes Vincent Reinhart in "Simple Rules for a Complex Financial World."


Image by Dianna Ingram/Bergman Group.

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