After seven long years, the most destructive financial crisis since the Great Depression is beginning to fade into memory – and myth. We haven’t talked about it in a while (2010 bailouts, 2012 EU crisis). Most discussions these days still are focused on assigning blame. This is understandable as well as necessary for accountability and for moral and ethical reasons. But, it shortchanges, IMO, another more timely aspect of the financial crisis that gets way too little public attention: Are our governments doing enough to prevent or a least, better contain the next one? Is our fragile financial sector finally tamed and at an acceptable cost?
We have to know the answer because there’s always another crisis. Since 1980, the world has seen 6 major global financial crises; a dozen or so smaller, regional ones; and, by one count, close to 150 single-country banking crises. Crises are frequent, getting bigger, and are easily transmitted around the globe. Our global financial system has yielded many benefits, but it is bubble-prone, panic-prone, and seemingly inherently unstable.
Since 2008, governments put in place a smorgasbord of new regulations to try to better monitor global finance, fix the system’s worst vulnerabilities, and prevent or better respond to the next crisis. What’s been done is very complicated (maybe too complicated, as we’ll discuss). I read a lot on this subject, but I don’t know the whole lay of the new regulatory and macroeconomic land very well, especially some of the more arcane efforts.
So, I thought Monday we would focus our discussion on the most important actions taken in the United States to prevent future financial catastrophes. Most of them stem from the 2010 Dodd-Frank financial reform law, so I will open us up by describing the basics of what that law tried to do and the major regulations that have come out of it. I may also briefly outline some other governmental actions in this area that have gotten even less media coverage but will affect us all.
Of course, we cannot spend an entire evening discussing banking regulations. (Who would want to?) So, in discussion maybe we can focus on a few big macro-level issues, like the “too big to fail” problem, the benefits versus the costs of new regulations, and the obstacle of Wall Street’s vast political power.
Discussion Questions –
- Causes – Big Finance: How much blame do private financial actors deserve for causing the crisis? How big a factor was financial fraud and lawbreaking? Were the banksters “out of control?”
- Causes – Who else: Were deeper, structural causes the real problem? What did governments do wrong and why?
- Choices: After the crisis hit, what options did governments have to stem the crisis and reform the system? Why did they choose some (bailouts) and not others (nationalizing big banks, aid to homeowners)?
- Fixes: What was done in the end? What is in the Dodd-Frank law? What else?
- Results: How can we know if these policies are either (1) working, or (2) working too well by burdening the financial sector/real economy?
- What do you think will happen in the next crisis? Same old same old, or something more radical?
SUGGESTED BACKGROUND READING –
- Was Big Finance out of control?
- Our economy has become too “financialized.”
- Big Finance’s political clout is the underlying problem. Recommended. More detail: “The Quiet Coup.” (Long).
- Krugman: Causes of crisis were both structural and ideological.
- Wrong. A simple lack of effective govt financial oversight caused the crisis. (A much harder read).
- The Dodd-Frank law:
- Of special note:
Next Week: Is it time to change California’s ballot initiative process?