[A-List] Technical question (Regulation Q interest rate)

[Henry C.K. Liu]

Do you mean the 1987 crisis? I am not aware there was a 1966 crisis.

The Fed's legislative victory was delivered on the back of a larger issue -
the deregulation of finance. In companion legislation, Congress repealed
virtually all of the remaining government limits on interest rates and
regulation on lending that had existed since the New Deal, much as the
enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 in effect
repealed the Glass-Steagall Act, the long-standing prohibitions on the
mixing of banking with securities or insurance businesses, and thus
permitting "broad banking". The price of money was free at last to seek its
"natural" equilibrium in the market place.

The prime rate rose above 15 percent in early 1980 when the deregulation
legislation reached its final stage. The Democratic Congress voted
overwhelmingly for a package that condemned borrowers to high cost and
favored lenders with high returns, by arguing that the benefit of high
interest on pension accounts justified the high cost of mortgage payments.
In other words, as Pogo the cartoon character said: "The enemies, they are
us." The populist Regulation Q, which regulated for several decades limits
and ceilings on bank and savings-and-loan (S&L) interest, was phased out.
Banks were allowed to pay interest on checking account - the NOW accounts,
to lure depositors back from the money markets. S&Ls' traditional
interest-rate advantage was removed, to provide a "level playing field",
forcing them to take the same risk as commercial banks to survive. Congress
also lifted restrictions on S&Ls' commercial lending, instead of the
traditional home mortgages, which promptly got the whole industry into
trouble that would soon required an unprecedented government bailout of
depositors with tax money. But the developers who made billions were allowed
to keep their profits. State usury laws were unilaterally suspended by an
act of Congress in a flagrant intrusion on state rights.

The political coalition of converging powerful interests was evident.
Virulent high inflation had damaged the holders of financial wealth,
including small savers, created by a period of benign low inflation earlier,
so that even progressives felt something has to be done to protect the
middle class. The solution was to export inflation to low-labor-cost areas
around the world, taming domestic inflation with the export of jobs and the
domestic inflation devil - US wages. Neo-liberalism was born with the twin
midwives of sound money and free financial markets, disguising economic
neo-imperialism as market fundamentalism.


BANKING BUNKUM
Part 3b: More on the US experience
By Henry C K Liu
Asia Times, November 27 2002

http://www.atimes.com/atimes/Global_Economy/DK27Dj01.html


xxxx wrote:

>Martin Wolfson argues that the 1966 crisis happened because of the Fed's
>"refusal to raise Regulation Q interest rate ceiling on large negotiable
>certificates of deposits" Is this refusal a sign of "tight" or "easy"
>monetary policy?
>
>Regulation Q is a limit on time deposits to prevent the growth of money
>supply. So if the Fed did not increase the Q ceiling, it means that monetary
>policy was not tight. Correct or wrong?
>
>but why do keynesians say that the crisis happened becase of tight monetary
>policy. do they mean "high interest rates" or "low regulation q ceiling"?
>
>Any direct response on this is greatly appreciated
>
>3 monetary tools durin a crisis:
>
>1) regulation q ceiling
>2) reserve requirements
>3) discount rate
>
>
>
>******************************************************
>xxxx A. xxxx
>Doctoral Candidate
>Department of Political Science
>Nelson A. Rockefeller College of Public Affairs and Policy
>University at Albany, S.U.N.Y.
>135 Western Avenue, Milne Hall
>Albany, NY 12222
>xxxx at verizon.net
>******************************************************
>"They always say that time changes things, but you actually
> have to change them yourself." -- Andy Warhol
>******************************************************
>
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