Mercatus Center: Financial Regulation Increased in Decade Leading up to Crisis

The Mercatus Center of George Washington University posted this graph, produced by Patrick McLaughlin and Robert Greene, to Twitter today:

From a July 19th article that accompanied the graph:

Total regulatory restrictions pertaining to the financial services sector grew every year between 1999 and 2008, increasing 23 percent during this time. The Patriot Act, the Sarbanes-Oxley Act, and Regulation NMS all contributed to this growth. The repeal of parts of the Glass-Steagall Act via the Gramm-Leach-Bliley Act did not result in noticeable deregulation of the financial services sector. Nor did the Commodity Futures Modernization Act facilitate overall financial deregulation. Not even the Financial Services Regulatory Relief Act of 2006, legislation intended to decrease regulatory burdens on the financial industry, reversed the ever-growing burden of regulatory restrictions faced by the financial services sector in the years leading up to the financial crisis.

As we show in this analysis, financial regulatory restrictions increased 17.9 percent in the years leading up to the crisis. Without the streamlining efforts of the late 1990s—which reduced duplicative regulatory text and were unrelated to the acts of Congress typically blamed for alleged deregulation—this figure would likely be even higher.

Now, if I didn’t point out that these numbers came from somewhere, and that it’s impossible to evaluate these claims if we don’t understand the numbers and how they’re being used. McLaughlin and Greene quantify regulation using a tool developed by the Mercatus Center called “RegData,” and provide a rough measurement of “regulation” by “counting the number of restrictive words and phrases–such as ‘may not,’ ‘must,’ ‘shall,’ ‘prohibited,’ and ‘required’–in each title of the CFR” (Code of Federal Regulations). Right away, it’s important it point out that this isn’t a perfect measurement of regulatory burden, since verbose but relatively inconsequential regulations may count heavily in RegData and thus mask the repeal of terse regulations that nevertheless have broad consequences.

Still, though, “deregulation” is such a persistent narrative that data such as this is certainly worth considering.

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