The View From 1776
Wednesday, October 15, 2008
Banking Regulation 1933 and 2008
Federal financial regulations enacted in 1933 obviously have not prevented wild stock market swings and financial panics since then, and currently proposed regulations won’t prevent future recurrences.
Popular mythology, continually preached by liberal-progressives, is that the 1929 and 2008 crashes were caused by wild speculation in the financial markets. In fact, the underlying cause in both cases was the same: excessive expansion of the money supply by the Federal Reserve.
In 1929 it was said to have been the product of insider manipulation and the public’s speculative mania. The real cause was the Fed’s excessively easy money policy to support rebuilding of European economies after World War I’s devastation. Responding to the flood of money and lower interest rates, farmers and manufacturers went into debt to expand their output for export to Europe. European banks borrowed heavily in New York to pay for those exports. When our high tariffs impeded Europe’s ability to sell goods to us to repay their loans, the economy began to tank, leading to the 1929 crash.
In 2008, liberal-progressives similarly attribute the financial collapse to banking deregulation that supposedly induced speculation, greed and criminality of lenders and investment bankers, a view that is shared by the great majority of the public.
For both the 1929 and 2008 crashes, the generally accepted remedy has been strict, even punitive, additional regulation of banks and financial markets. But this is analogous to dealing with building collapses by regulating paint jobs and exterior trim.
Students in the post-World War II 1950s and 60s were taught that President Franklin Roosevelt’s Keynesian economic policies adopted under the New Deal would prevent future depressions and that financial market aberrations had been prevented by creation of the Securities and Exchange Commission and the Federal Deposit Insurance Corporation.
Experience has revealed this to be malarkey. Today’s disaster was preceded by the 1990s massive dot-com boom and bust, and by the 1980s collapse of the savings and loans caused by the run-away inflation induced by President Johnson’s Great Society welfare-state entitlements spending. The same recurrent pattern can be observed all the way back to the end of World War II.
Each time, new sets of regulations were imposed, but the boom-and-bust phenomenon keeps coming back, always in a slightly different manifestation not anticipated by the latest set of regulations.
As I wrote in Liberals’ Wall Street Pirouette (March 22, 2008):
Human beings, from the wage-earning homeowner to the Wall Street tycoon, will always find ways to use huge amounts of money when the economy is awash in liquidity created by the Fed