AS WALL Street vacillates wildly and, in general, downwardly while awaiting a government bailout that is currently in limbo, Americans find themselves staring into the dark abyss of certain recession or perhaps even a depression. Though it remains likely that Congress will approve a substantial plan to combat the collapse of major financial institutions, there should be little doubt as to the source of the economic debacle that has occurred over the last few weeks: the deregulation of our economy, particularly the major lack of oversight aimed at the lending practices of financial firms.
While I am no economist, I am a history major and it is clear that throughout American economic history, our greatest financial crises have occurred at the times of least governmental oversight and control. In the 19th century, a period of little regulation and boom-and-bust cycles, the discontinuation of the centralized Bank of the United States led to the promulgation of unstable free banking and “wildcat banks” that often issued bills without the specie to back it, leading to a devaluation of the distributed currency and fears that the government would not trade the bills for gold at their original value, reservations that contributed to the Panic of 1857. Railroad over-expansion and large farm debt in the late 19th century and early 20th century helped cause the Panic of 1893, as Gilded Age governments rarely intervened in the economy. The Panic of 1907 was instigated by an attempted cornering of the copper market that caused United Copper’s stock to fall hard, destroying brokerage firms and leading to a run on banks, pushing savings banks into insolvency. This crisis was the impetus for examining the recreation of a central banking structure that eventually became the Federal Reserve System. Naturally, the grandest example of the dangers of speculation and lack of oversight is the Great Depression, where over-lending by banks to investors, who were often lent two-thirds the value of the shares they intended to buy, led to a massive economic bubble that popped in October of 1929.
Throughout our history, each time banks and investors have been allowed to fund over-building, create over-speculation in the market, or lend money they don’t have, America has ended up with an economic crisis. Sure, markets see periods of growth or stagnation, even recession. Nevertheless, the dramatic creation of economic instability historically and, in the current emergency, occurred when investors and banks went far beyond the reasonable system of risk and reward that drives the marketplace, This time around, the principal culprits were subprime mortgage lending (where banks loan money to individuals who traditionally can not receive market interest rates due to credit history, income or other factors) and the ability of large financial corporations to sell mortgage-backed securities to other investors, essentially buying and selling the loans of ordinary people from each other to make more money while supposedly passing on the risk of the mortgage to someone else.
Banks and brokerage firms were able to engage in these activities because of the steady repeal of New Deal protective measures since the 1970s. The Private Securities Litigation Reform Act of 1995 made it tougher for investors to sue companies over speculative misstatements, helping to lead to the tech bubble bursting in 2000, an economic debacle in itself. After the 1999 repeal of the Glass-Steagall Act of 1933, which kept commercial and investment banking separate, banks were able to gain control of brokerage firms, more easily loan money and trade mortgage-backed securities. Crony capitalism went on at Freddie Mac and Fannie Mae, government-supported entities that padded the wallets of United States House Committee on Financial Services, whose actions particularly affected the mortgage firms. In fact, Freddie Mac was hit with a $3.8 million fine in 2006 from the Federal Election Committee for illegal campaign contributions. There was a serious lack of oversight in the banking business, as the Security and Exchange Commission has admitted that self-regulation of investment banks helped create the on-going crisis.
No matter the cost of the eventual bail-out, new rules need to come along with the billions, even trillions, of dollars the U.S. government will be handing Wall Street. First, there needs to be a recreation of Glass-Steagall that will prevent the intermixing of commercial and investment banking. Second, there should be new rules on lending policies that prevent banks from trading mortgage-backed securities of subprime mortgages. If a bank is going to issue a subprime mortgage, it should have to take on that risk. Third, a drastic modernization of regulating the overall financial system is needed because of unregulated modern investing methods like the $70 trillion business of credit default swaps, which were particularly responsible for the collapse of AIG. The current congressional leaders better make sure to pass a bailout bill that forces major oversight on Wall Street with tougher regulatory measures that can help the American economy avoid future crises on this scale. We need these kinds of regulations so the boom-and-bust cycle of the 19th century doesn’t continue to precipitate problems in the 21st.
Geoff Skelley is a Cavalier Daily Viewpoint Writer.
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