Oversight and Regulation: Too Much or Too Little?
Many economists are citing the lack of regulation of the financial markets as one of the primary causes of the recent economic collapse. Alan Greenspan, once a believer in deregulation, blames the crisis on the financial industry’s inability to monitor itself. A pattern of financial deregulation over the past two and a half decades paved the way for financial companies to experience sky-high profits. This is good for the economy in the short-term, but it resulted in economic bubbles that damaged the economy outside of the finance industry, eventually bringing down the biggest banks and brokerages.
In 1999, Congress repealed the Glass-Steagall Act, which was originally passed amidst the stock market crash of 1929 to separate banking businesses from brokerage businesses, but the breakdown of this regulation began in 1980 with the Depository Institutions Deregulation and Monetary Control Act. The law was repealed to allow banks to better compete with brokerages when selling products that may not be clearly defined as “bank products” or “brokerage products” and to allow American financial companies to better compete with international financial institutions that were not bound to such regulations.
Regulatory bodies, like the FDIC, OTS, and SEC still remain, however. Even with no oversight of complex financial derivatives like collateralized debt obligations, credit-default swaps, and the hedge funds that invest in them, regulators should have warned us better of the impending financial collapse. Is this a failure of regulators, proving oversight just gets in the way of business? Perhaps, as some politicians argue, too much regulation has tied the financial industry’s hands, leaving them unable to make the decisions that needed to be made in order to prevent a financial crisis.
Was it the excessive government involvement in the economy, with Freddie Mac and Fannie Mae as the examples, that spurred this recession or the lack of effective oversight allowing financial institutions to place risky bets without cash collateral?