Personal Finance

Oversight and Regulation: Too Much or Too Little?

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Last updated on July 28, 2019 Comments: 9

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In 1999, Congress repealed the Glass-Steagall Act, which was originally passed amidst the stock market crash of 1929 to separate banking businesses from brokerage businesses, but the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 The law was repealed to allow banks to better compete with brokerages when selling products that may not be clearly defined as “bank products” or “brokerage products” and to allow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?

Article comments

Anonymous says:

I’d say it’s a combination of the two; government intervention combined with financial motivations to result in a national and international crisis. Fanny and Freddy are the primary examples. You have Government Sponsored Entities that had to both provide profit to shareholders and meet the edicts of the government, leading them to make deals that a purely governmental OR purely private entity would not. As the old saying goes, you can’t serve two masters.

Anonymous says:

Consumers asking for change mandated by the government is misguided and often wrong-headed. Do we need change? Yes, but often the kind we ask for is poorly thought out. Populism is NOT a panacea, and rarely leads to meaningful change.

Greenspan was 1/2 right about regulation – the part he was right about was that oversight was missing. He was wrong that more was needed, or even that his views were wrong. He was forced to make those statements by the prevailing political wisdom of the times. It’s a shame he no longer sticks to his guns the way he did when he was a younger man.

There was no way any federal bodies could have warned us of this – warning consumers of this is a difficult task, and often leads to Cassandra complexes. Fact is, if YOU didn’t see it coming, your head was in the sand. The problem is always a simple one: HOW BAD WILL IT BE?
Even I, a simple man with a regular job who happens to have a Master’s in Econometrics, saw the housing bubble and recognized the danger it entailed. I knew the day of reckoning was approaching when I saw “Sold Out” signs on condos in Florida, but nobody living in the finished products. Sorry if none of you saw it, or listened to the people who did. But the government’s job isn’t to warn us….if they warn us, they set off a panic – don’t they (just look at Obama’s fearmongering in Jan/Feb)?

Fact is, while oversight could have prevented some portions of this mess, and certainly kept it from boiling over to the point we are currently at, we still would have had a tough row to hoe. Why? Because we all want to believe that UP is the only direction that is meaningful. As an economist, I know this is incorrect. When I hear “the economy is broken”, I LAUGH. It’s not broken. It’s doing what it ALWAYS does after a boom. It’s readjusting to the excess. This is NORMAL. This is why we prepare for bad times during the good (remember the story of the grasshopper and the ant? Oh, you missed that one? Sorry…that’s what socialized education does to you.)

Look – we needed more oversight to prevent excesses and predatory behavior. But we also needed responsible consumers. Anyone STUPID – YES STUPID – enough to take out a $500,000 mortgage when they earn $45,000 a year ISN’T BEING PREYED UPON. They are idiots. Being PREYED upon is something that happened to me – being sold one mortgage and getting another. Luckily, I’m not an idiot and I changed mortgages after 2 months and sued.

I cannot help but laugh when people think the government can get us out of this. It never works that way, folks. You have to get yourself out. Live economically, live within your means, take cautious risk when it’s available, but take the BEST opportunities when they present themselves.

I like Flexo because he’s all about pointing out opportunities with interest rates, credit cards, etc. But let’s be honest folks, there is no white knight in Washington, DC. There never was. If you want the government to help, please consider the areas it has performed “best” and longest:
The DMV – who likes going there?
The Post Office – yes, they’re so good they are losing to their competition…and still raising their rates.
AMTRAK – with one profitable corridor in the Northeast, they are able to subsidise the rest of their routes with taxpayer money, brilliant business strategy
IRS – OK this is one area where the government is brutally efficient. Um, sort’ve. They still lose out on a huge amount of uncollected taxes each year….but they do have some very good people working there and let’s face it, when it comes to collecting money, everybody puts their best foot forward.

So you want the government to help? Good luck. Keep asking. I’ll find an island and move.
We have plenty of rules and regulations. Let’s just enforce them. In the meantime, go read about the grasshopper and the ant. Then read “The Richest Man in Babylon”.

Folks, if you weren’t prepared, it’s not MY fault, and it’s not the government’s fault. So let’s stop asking for taxpayer funds to keep bailing out everybody…eventually there are no funds left to bail out anybody. It starts becoming monopoly money.

Anonymous says:

Regulatory bodies, like the FDIC, OTS, and SEC — all need to do more work to prevent these things from happening again.

Anonymous says:

I do think tougher regulation will instill some confidence into the markets and in the short term help us out of this mess.

For any regulation to be effective governments need to think on a global scale. To many inconsistencies exist from country to country. International standards are going to play a bigger role in how the markets are regulated.

Anonymous says:

I am not sure that the government can keep bailing companies out and using the money for banks and companies. It is not a good way to use peoples money. I think this is a way for the government to make money in the long term, and charge extra taxes for lending out the money.

Anonymous says:

The corporations and the investment industries will only change when the consumers demand it so. Government mandated monitoring will exert some pressure, but this pressure will tighten or relax along with the wind of politics and ties to the industry itself. The only unwavering voice that can have a long-term influence on the behaviour of corporations is from the consumers. Without a collective call for corporate responsibility, and without subsequent consumer behaviour modification that either rewards or punishes certain corporate actions, most businesses will continue to place the achievement of short-term goals before sustainability and corporate responsibilities.

Anonymous says:

Government should regulate banks and brokerages more. The credit crisis isn’t something that I think could really be seen. There are always people predicting gloom and doom, so now those guys look like geniuses. The sad thing is that I don’t think laws were broken, just bad deals made.

There should be regulations about selling and reselling mortgages with standard ways of valuing and describing them. If in the future someone sells a bundle of garbage and labels it “Investment Grade A” then someone should go to jail, be it the insurance company that doesn’t back the Grade A or the person who sold it who misrepresented the contents.

Anonymous says:

The real problem was not a lack of regulations but the governments inability to actually make people follow those regulations. This started with the Clinton years and carried over to Bush (basically all parties are guilty).

There is also a strong case for fannie and freddie causing a bubble in the housing market and that leading to the housing collapse and then the recession. Once again it was a lack of government acting on its own regulations that permitted this to happen. So what we are seeing is that government is plain incompetent.

Anonymous says:

What about the Federal Reserve itself? They’ve been cutting interest rates since 9/11 (or sooner?) to “spur the economy”, and now they blame cheap credit from China and Gulf states, not themselves, for the crisis. Without them, rates would have surely been higher, and there would have been less incentive for financial institutions to take these kinds of risks.