The recent recession represented a spectacular failure of unfettered capitalism. We never felt the full force and completeness of that failure because the worst was averted (or more probably just delayed) by vast injections of Government bailout money. Capitalism was rescued by good old fashioned Socialist Big Government, and the bill is being sent to we the taxpayers.
Although vested interests have tried to deny or obfuscate, it’s pretty clear that (after simple greed) the major factor which allowed the crash to happen was a relaxation of financial regulation. A nice accessible summary was given by Professor Elizabeth Warren in the interview with Jon Stewart that was posted here (second clip).
Warren points out that America’s early history was characterised by a rapid boom and crash cycle, culminating in the Great Depression. In the wake of the Depression America introduced financial regulations, most importantly the Glass-Steagall Act, FDIC Insurance, and SEC regulations. After that “We go 50 years without a financial panic, without a crisis”. But…
… then what happens is we say, “Regulation? Ahh, it’s a pain, it’s expensive, we don’t need it.” So we start pulling the threads out of the regulatory fabric, and what’s the first thing we get? We get the S&L crisis. 700 financial institutions failed. Ten years later, what do we get? Long-term capital management, when we learn that when something collapses one place in the world, it collapses everywhere else. Early 2000’s, we get Enron, which tells us the books are dirty. And what is our repeated response? We just keep pulling the threads out of the regulatory fabric.
So we have two choices. We’re gonna make a big decision, probably over about the next 6 months. And the big decision we’re gonna make is, it’s gonna go one way or the other. We’re gonna decide, basically, “Hey, we don’t need regulation. You know, it’s fine: boom-and-bust, boom-and-bust, boom-and-bust” â€” and good luck with your 401(k). Or alternatively, we’re gonna say, “You know, we’re gonna put in some smart regulation that’s going to adapt to the fact that we have new products,” and what we’re gonna have going forward is, we’re gonna have some stability and some real prosperity for ordinary folks.
Well, this shoe has now dropped:
Dodd unveils sweeping financial regulation plan
A new Democratic Senate bill to tame the financial markets would give the government new powers to break up firms that threaten the economy and would force the industry to pay for its failures.
Legislation unveiled Monday by Senate Banking Committee Chairman Christopher Dodd falls shy of the ambitious restructuring of federal financial regulations envisioned by President Barack Obama or contained in legislation already passed in the House. But the bill would still be the biggest overhaul of regulations since the New Deal. It comes 18 months after Wall Street’s failures helped plunge the nation into a deep recession.
A leaner Federal Reserve would gain new powers to regulate the size and the activities of the nation’s largest financial firms. The bill would create a consumer protection bureau within the Federal Reserve to write regulations governing all lending transactions. Bank regulators, however, could appeal those regulations if they believe they would affect the health of the banking system. … The breadth of the bill would touch all corners of the financial sector, from storefront payday lenders to the highest penthouse office suites on Wall Street.
Perhaps America has managed to learn something from the crash. Of course this is only a proposal, it could still be derailed by the vicious tactics of vested interests (in much the same way as Obama’s health reforms). But it shows that at least some part of the American political system has learned the lessons of the crash, and is trying to take some sensible action.