Financial deregulation refers to the loosening of laws and regulations that govern the banking industry. For example, usury is theoretically illegal, but with deregulation, banks may offer loans at higher interest rates than before. Some say that financial deregulation is necessary to the health of the banking industry; others point to history to prove that financial deregulation causes a few to become rich while causing large-scale financial crises.
Economist Richard Parker traces America's current financial deregulation back to 1982. During the early years of Ronald Reagan's presidency, the demand for loans from banks was low and the banking industry worried about lost profits. In order to cater to the banking industry's perceived needs, the Reagan administration passed numerous deregulatory policies. These policies loosened up the rules for giving out loans. That means banks could now offer loans to people with less money, fewer assets and less ability to pay off the loans.
The financial deregulation of the banking industry continues to be in effect in 2011 and has had tremendous effects upon the housing market in the United States. As the housing bubble grew, bank employees approved mortgage loans to people who were unlikely to be able to pay them back based upon their income and other expenses. When a person defaults on a mortgage, the rules allow the bank to seize the debtor's property. For example, if you get a loan to buy a house, but stop paying the mortgage, the bank takes your house. You must vacate the house and let the bank sell it to someone else. The bank wins, you lose.
Georgia State University School of Law published in 1987 an explanation of the effects of financial deregulation of credit card laws. Laws that were new at the time removed the 18 percent cap on the annual percentage rate for charging interest. This left the credit card industry free to charge cash-strapped consumers interest rates as high as 35 percent. Credit card financial deregulation also removed the rule that annual membership fees could not exceed $12. Since then, people have paid much more per year to have a credit card.
Regulating the financial industry gives the government control to monitor the practices of large banks. Regulating the financial industry also gives the government power to charge the banks additional taxes and raise revenue. For example, in January 2010, President Obama proposed a $90 billion tax package on the banks in order to regain money loaned to them during the crisis.
Deregulation means giving the banks the power to make their own rules. The less regulation, the more power the banks have to make rules that benefit the bankers but not necessarily the people. As David Leonhardt of The New York Times points out in his essay "Income Inequality," deregulation is one institutional force contributing to the widening gap between rich and poor. Other contributors to this problem include stagnation of the minimum wage and dismantling of labor unions, according to Leonhardt.