The Fine Balance of Regulation

I like this video from Say It Visually because it’s simple enough for a kid to understand – almost. If you watch it, you’ll see the emphasis, if not blame, is placed on deregulation. Specifically the Financial Services Modernization Act of 1999 is prominently featured.

I wonder if we can ever truly strike the right balance of free markets and regulation, or if like the teeter totter of cash and promises the video uses to explain credit, the rules we set for the financial markets must fluctuate, remaining in constant motion to react to changing situations.

From the Great Depression to Glass-Steagall and Back Again 

In 1933, the Glass Steagall Act restricted banks, brokerages and insurance companies from doing business each others’ industries. Investment banks and commercial banking were also separated. In 1994 President Bill Clinton signed into law the Financial Services Modernization Act of 1999, which in effect overturned Glass Steagall and legalized many of the technically illegal mergers that had already occurred.

In reading about the history of banking deregulation, one thing struck me more than anything else. In this 1999 opinion of the Financial Services Modernization Act of 1999 Martin McLaughlin noted that the Glass-Steagall Act of 1933 wasn’t really intended to protect consumers, but to rescue a banking system which had collapsed, wiping out the life savings of millions of working people, and threatening to bring the profit system to a complete standstill.”

In the years that followed and the economic picture began to look better, the restrictions imposed by Glass-Steagall were gradually relaxed to help banks become more profitable and competitive with foreign firms, including lifting many of the restrictions on the savings and loan industry in the 1980s, and culminating in 1999’s ‘modernization’. According to McLaughin, one 1999 Wall Street Journal headline celebrated the end of various restrictions with the declaration that “Finally, 1929 Begins to Fade.”

McLaughlin goes on to opine that “The repetition of such events in the much larger banking and securities markets would be beyond the scope of any federal bailout.”

Apparently not.

Is there an ideal regulatory balance or are we forever doomed to cycle through a repeating history?

  • Glad you liked the piece, Lela. We were aiming to provide a useful mental model for the subprime crisis when we created this – who’d have dreamed how quickly that would spiral into a much, much larger set of issues.
    Ironically, someone else critiqued the piece as blaming the ‘little guy’ instead of regulatory bodies. Guess that’s success of a sort.
    Thanks for posting this, we appreciate the comments.