Re-tooling the financial regulatory system — and the economy
Financial crises the "hardy perennial" of unregulated financial systems.
by Robert Pollin, Boston Review
The collapse of the housing bubble and the speculative market for subprime mortgages demonstrates, yet again, the simple point that financial markets need tight regulation. Since September 2008 a series of massive bailouts by the US Treasury and Federal Reserve have prevented financial markets from experiencing a 1929-style collapse. These extreme measures, however, have not solved the broader problems at hand. As of this writing, we are experiencing the most severe economic downturn since the 1930s.
American politicians — Democrats and Republicans alike — began deregulating the US financial system in the 1970s. Their premise was that regulations devised during the 1930s — specifically the Glass-Steagall system, which defined separate spheres for commercial and investment banks — would hinder the effective workings of contemporary financial markets. The 2001 Economic Report of the President, Bill Clinton's last, unequivocally dismissed Glass-Steagall: "Given the massive financial instability of the 1930s, narrowing the range of banks' activities was arguably important for that day and age. But those rules are not needed today."
The chorus of politicians and economists who for a generation advocated financial deregulation were right about one thing: the financial system has become infinitely more complex since the 1930s. Something that had been as simple as a local Savings & Loan making a home mortgage in their community — recall Jimmy Stewart in It's a Wonderful Life — is now part of a speculative global market. The old regulations had indeed become outmoded, but it never followed that financial markets should operate unregulated.
The historical record makes this clear. In the classic text Manias, Panics and Crashes, Charles Kindleberger called financial crises a "hardy perennial" within the context of unregulated financial systems. He documented that, from 1725 onward, financial crises have occurred throughout the Western capitalist economies at an average rate of about one every eight and half years. . .
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Links and sources
Tools for a New Economy, by Robert Pollin, Boston Review, January 2009
Posted: January 24, 2009
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