Preventing Financial Crisis in the US for Stability

Starting in the 19805, the United States has witnessed an unprecedented concentration in the financial sector. Through the development of remarketized capitalism and its corresponding wave of market deregulation in the 19805, financial institutions have become more concentrated than ever in large corporate conglomerates. This heavily concentrated industry embodies the very dangerous “too big to fail” mentality which has repeatedly threatened to collapse the global economy. Both the stability and success of capitalism depends upon strictly regulating the financial sector in a manner consistent with the understanding that the financial sector will always look to surpass ethical boundaries.

The shift to marketized capitalism in the United States mirrored a fundamental transition in economic policies that were centered upon market deregulation.

As Fulcher points out in Capitalism, managed capitalism developed under the presidency of FDR through his administration’s response to the Great Depression He argues that in the United States, “the monopolistic tendencies of business corporations meant that economic life required regulation, if competition were to be maintained and the interests of consumers protected” Large, centralized financial institutions were one of the reasons the Great Depression was so severe.

The financial sector had become a massive part of the economy, interconnected with every major industry, and when it collapsed in 1929, the repercussions were amplified compared to the effects of smaller banks becoming insolventt Through the New Deal and other policies designed to regulate the financial sector and stabilize the country’s economy, FDR ushered in an era of managed capitalism in the United States Up until the late 19705, the domestic policy of the United States reflected these principles in practice.

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The regulation was widely regarded as necessary to maintain a stable domestic marketplace, especially with UtSt‘s involvement in international conflicts such as World War 2 and Vietnam. However, in the late 19705, a shift in policy towards deregulation marked the beginning of remarketized capitalism in the United States. As pointed out in a report for the Center for Economic and Policy Research by Mathew Sherman, the shift to remarketized capitalism can trace its beginning to the Supreme Court ruling of Marquette vs. the First of Omaha in 1978, where in a five-to-four decision the court decided to allow banks to apply the usury laws of their home state to their national operations. Shortly after this, South Dakota eliminated it usury rate ceilings in order to attract the headquarters of Citibank’s credit card operations, As put by Sherman, “Overnight, South Dakota had become a regulatory haven for the credit cards industry”, and this prompted other states to scrap their usury rate ceilings As a result, even though only several states had no usury rate ceilings, this applied nationwide because banks had their credit card operations relocated to states with these favorable policies, causing a boom in the credit card industry.

This wave of deregulation continued with both the Depository Institutions Deregulation and Monetary Control Act and the Garn-St. Germain Depository Institutions Act. These laws completely deregulated the savings and loan association industry entirely, and although the goal of these policies was to help the industry, Sherman points out that, “it allowed these firms to enter into new financial territory with new risks”. As a result of accumulating risk, the financial sector saw its first crisis since the Great Depression: the savings and loan crisis of the 19805. To resolve this crisis, the administration of George H.W. Bush signed the Financial Institutions Recovery and Enforcement Act, which provided for a bailout of the thrift industry estimated to cost about $210 billion for American taxpayers. With the bailout in 1989, Bush took a fundamentally different approach to resolving the crisis than Roosevelt, who by restoring public faith in the banking system and instigating strict new regulatory measures, caused the public to began re-depositing money back into the banking system without the need for a bailout.

The bailout by Bush lacked these strict new regulatory measures that FDR’s New Deal instigated, and without new regulatory measures, the financial sector continued to expand un—checked, Continuing on this course, in 1999, congress passed the Gramm-Leach-Biiley Act to completely repeal the Glass Steagall Act of 1933, which was an important part of FDR’s reform to the banking industry so as to prevent another crisis from happening. Glass Steagall had, as argued by James Rickards in a US. News opinion piece, “separated commercial and investment banking for seven decades”, and its repeal led to the merger of Citicorp and the Travelers Insurance Group, which created the largest financial services company the world had ever seen. Mathew Sherman points out that between 1990 and 1998 the number of banking institutions decreased by 27 percent as banks continued to merge, and the industry became even more concentrated in the years leading up to 2007i.  The financial crisis witnessed in 2007—2008, and the global recession that followed, is said to be the worst since the great depression.

Much similar to both the depression and the crisis of the 1980s, large financial institutions had, in exploring newly deregulated financial territory, made massive exploitations of the real estate industry in the pursuit of seemingly never-ending profits. Through the “packaging” of securities to be sold between financial institutions, everyone seemed to make money, with the brokers getting fees for the transactions, and the institution that ended up with the packaged mortgages getting the monthly payments from the homeowners However, as pointed out in the presentation by Jules and Fiona, since there isn’t an unlimited supply of responsible homeowners, fraudulent subprime mortgages began to flood the system. When subprime homeowners didn’t pay their monthly deposits, everyone was left holding these “toxic mortgages”, and the bubble popped quite suddenly when these institutions couldn’t pay back the money they had borrowed to buy the mortgages in the first place.

As many of these institutions, such as Citigroup and Bank of America, were suddenly placed on the verge of bankruptcy, taxpayers again witnessed a massive bailout under the Bush Administration, this time for over $750 billion Again, this bailout was not accompanied by any significant regulatory legislation, and some, including former Secretary of the Treasury Hank Paulsen, have argued that at the peak of the crisis it was too late for regulatory measures The financial sector had become so integrated into the economy that its collapse might threaten to destroy the economic system, and with the level of concentration in the industry, the bankruptcy of more than a few institutions might very well prove to do this.

The need to prevent these large institutions from collapsing for the sake of global economic stability is what has become known as “too big to fail”. The different financial crises that the United States has witnessed have all stemmed from the same problem: lacking regulations Despite this, only the Great Depression was contained appropriately through the measures instigated by FDR’s administration, and every other crisis has seen a failure of public policy to address the underlying issue, Crises are not a part of capitalism’s nature, but rather a radical permutation in which the financial sector has sought to enrich itself through unnecessary expansions As seen in the decades of managed capitalism in the United States, capitalism flourishes with strong regulations on the financial sector. In the absence of strong financial regulation, crisis after crisis has occurred, each worse than the previous one Unless new regulatory policies are adopted, another will certainly occur, possibly even worse than that of 2008‘.