10 Unforeseen Effects of Deregulation


Going Bust

When deregulation goes awry, companies it was intended to help can go belly-up. Sometimes, the problem appears to be lack of restraint. The deregulated industries run wild, reveling in their new freedom.

That happened to some of the established airlines after Congress passed the Airline Deregulation Act of 1978. Actually, many of the major airlines had opposed the deregulation. They didn't want new competition. But Congress got them on board by providing subsidies for them.

When start-up airlines entered the market, competition took off. Many of the older airlines competed with a frenzy, expanding into new markets.

The result? Bankruptcies. Venerated names such as Pan Am, Eastern and TWA disappeared, leaving three major airlines in the United States [source: U.S. Centennial of Flight Commission]. Most airlines that survived continued to struggle as they faced rising fuel costs and security problems after 9/11.

Another good example is the savings and loan industry. Struggling savings and loans in the 1970s and early 1980s thought eased federal regulations would solve their problems. Deregulation, most notably the Garn-St. Germain Act of 1982, erased most of the distinctions between S&Ls and commercial banks. S&Ls could offer riskier loans, and for more than just homes. They could offer checking accounts and credit cards.

With less oversight, many S&Ls went on a lending and investing spree. Some S&Ls were bought by speculators seeing a chance for big profits.

Then as the 1980s wore on, the bubble began to burst. S&Ls were failing right and left. In the late 1980s, a federal bailout and cleanup. Estimates of how much it ultimately cost range as high as $160 billion [source: Ely].

It can get worse. Keep reading.