Deregulation and New Financial Legislation Set the Stage for the Financial Crisis

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For my previous two posts, I focused on the financial reform and regulatory legislation and securitization’s impact in the Enron crisis.  Doing research for both of these posts introduced me to the controversial topic of financial regulation and deregulation.  For my final paper I’m focusing on the financial regulation and deregulation that influenced behavior and was responsible for the financial crisis that’s led us into the Great Recession.  There are many questions that need to be addressed for this topic.  Why and who desired the new regulations and the deregulation of the financial markets in the US?  How was this legislation needed or not needed?  What were the pros and cons of some of the pieces of legislation?  Where did the regulatory system fail and why?  Researching these questions will paint a clearer picture of what set the ground work for the financial crisis.

Through my research for my past two posts, I’ve found that leading up to the financial crisis there was disproportionate amount of financial market scandals compared to prior period in US financial history.  In the testimony of Denise Crawford, which I found at the Financial Crisis Inquiry Commission, she attributed this trend of scandals to the deregulation that went on prior to the financial crisis.  But as my research shows there were many failures in the regulation of the US financial markets.  The long list includes gaps created by deregulation and regulation, flawed beliefs of self-correcting markets, fraud, ignorance of regulators and businessmen, and much more.

The deregulation of the 1990’s and early 2000’s was driven by large US financial firms that used their immense sway with politicians to influence public policy in their favor.  Financial firms wanted deregulation in order to break down barriers and free up the flow of capital the financial market.   It also gave US financial firms and banks a huge advantage over their international competitors, which helped destabilize financial systems internationally.  The deregulation of other markets in US history has the same features, big businesses using their monetary influence on politicians to get legislation they want passed or blocked.  It’s interesting to see how the politicians and lawmakers are actually being influenced and pressured by the very people they are supposed to be controlling and regulating.   “Under the Financial Modernization Act adopted in November 1999, US lawmakers had set the stage for a sweeping deregulation of the US banking system” that led to the creation of new risky financial products, risky business models and strategies, and carelessness of businesses and the regulatory bodies presiding over them.  It seems that “when economists calculated the benefits of deregulation, they left out the costs”.

Not all legislation passed before the financial crisis has had a negative influence on the financial markets.  The passing of the Sarbanes-Oxley Act, though only a response to Enron’s fraudulent business practices, was a piece of legislation that was a step in the right direction.  But one act wasn’t enough to compensate for the wave of deregulation that was occuring in the US financial markets.

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3 Responses

  1. The deregulation that was a result of the pull that big firms had with politicians is terrifying. Enron was allowed to structure their balance sheet the way they did (and defraud investors as to how much their company was actually worth) because they petitioned the SEC to make an allowance in their regulations. The SEC agreed because of the power Enron had. This ended up having disastrous results. Unfortunately we can see a similar thing in the deregulation of the banking industry. It is unfortunate that instead of guarding the interests of the American people, politicians are more easily swayed by the requests of powerful companies. Do you think that Washington will fix their mistakes of deregulation with new legislation? Or will their attempts for reform be dragged down by partisan politics and we will be no better off than before the financial crisis?

  2. What is that cartoon? How is it relevant? I can’t see it very well.

  3. Yeah sorry about the picture. I attempted to find a better version of it on Google Images, but was unsuccessful. The images was one that I had seen years ago either in elementary school or high school when we were covering monopolies. Though my topic has little to nothing to do with monopolies the idea of big business’ control on government and Justice’s inability to affect and deal punish the practices of big business.

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