A Short History of Financial Deregulation

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Questions and Answers

What was one major goal of deregulation in the 1970s and 1980s?

To eliminate all forms of regulation

To increase government control over industries

To lower consumer costs (correct)

To decrease consumer participation in markets

Which industry faced significant criticism for regulation being inefficient and burdensome in the 1970s?

Healthcare

Agriculture

Telecommunications

Transportation (correct)

What impact did deregulation have on the airline industry?

Lower fares and more competition (correct)

Complete government takeover

Monopoly control by a few airlines

Increased fares and reduced competition

What was a consequence of deregulation mentioned in the content?

Job losses due to industry restructuring Signup and view all the answers

Which movement expanded the scope of regulation beyond economic concerns?

Environmental movement Signup and view all the answers

What were the New Deal policies primarily designed to address?

Stabilize industries and address market failures Signup and view all the answers

What did critics of regulation in the 1970s often associate with overregulation?

Increased costs and inflationary pressures Signup and view all the answers

What was one of the original purposes of regulation during the Progressive Era?

To limit the power of corporations and monopolies Signup and view all the answers

What was Brooksley Born's primary concern regarding the derivatives market?

It posed significant systemic risks. Signup and view all the answers

What was the general attitude towards Brooksley Born's proposal to regulate derivatives?

Many feared it would hinder innovation and profits. Signup and view all the answers

What was the outcome of the Commodity Futures Modernization Act of 2000 for the CFTC?

Lost regulatory authority over derivatives. Signup and view all the answers

What triggered the dot-com bubble burst in the stock markets during the 1990s?

Over-speculative investments and rapid tech growth. Signup and view all the answers

What characterized homeowners during the financial intermediation process leading to vulnerabilities?

They took on large mortgages beyond home values. Signup and view all the answers

What was the consequence of falling housing prices during the financial crisis?

Widespread mortgage defaults and credit market freezes. Signup and view all the answers

What is a key advantage of corporations over sole proprietorships and partnerships?

Limited liability for owners Signup and view all the answers

What does it mean for a bank to be underwater?

Liabilities exceeding its assets. Signup and view all the answers

What additional requirement did companies need to invest in local infrastructure in the 19th century?

Government approval in the form of a corporate charter Signup and view all the answers

Why can financial risk never be completely eliminated?

Market uncertainties are always present. Signup and view all the answers

How did communities benefit from privately provided infrastructure rather than government-provided options?

Faster development and innovation with less taxation Signup and view all the answers

What challenge did communities face as a result of corporate charters providing infrastructure?

Potential for monopoly pricing and political corruption Signup and view all the answers

What impact did the expansion of railroads and communication have on businesses in 19th century America?

Creation of a national market leading to enhanced competition Signup and view all the answers

What is horizontal combination in the context of business?

Combining with competitors to dominate the market Signup and view all the answers

What does vertical integration involve?

Controlling all stages of the supply chain Signup and view all the answers

What was one of the motivations for corporations to seek infrastructure projects in the 19th century?

To capture user fees and generate revenue Signup and view all the answers

What was the primary purpose of the Glass-Steagall Act enacted in 1933?

To separate commercial banking from investment banking Signup and view all the answers

Which event led to the repeal of the Glass-Steagall Act?

The Gramm-Leach-Bliley Act of 1999 Signup and view all the answers

What consequence did removing interest rate ceilings under the Depository Institutions Deregulation and Monetary Control Act of 1980 have on financial institutions?

Encouragement of riskier financial practices Signup and view all the answers

What role did the Federal Reserve System, established in 1914, play in the financial landscape?

To stabilize the economy and control the money supply Signup and view all the answers

What was a significant impact of the Glass-Steagall Act by the time it was repealed?

It enhanced banks' competitiveness on a global scale Signup and view all the answers

What was a major outcome of the deregulation following the repeal of the Glass-Steagall Act?

Prominent emergence of money market funds Signup and view all the answers

How did the 2008 financial crisis relate to the repeal of the Glass-Steagall Act?

It was exacerbated by banks engaging in risky practices Signup and view all the answers

What was one reason for the initial introduction of Regulation Q in 1933?

To limit the interest paid on savings accounts Signup and view all the answers

What is a major consequence of deregulation highlighted in the content?

Exposure to new vulnerabilities in industries. Signup and view all the answers

How do federal regulatory agencies derive their authority to act?

From enabling statutes passed by Congress. Signup and view all the answers

What differentiates statutory law from common law?

Statutory law is written and enacted by legislative bodies. Signup and view all the answers

In what way can interest groups challenge the actions of a federal regulatory agency?

They can file lawsuits and lobby Congress. Signup and view all the answers

Which two aspects of a federal regulatory agency's actions can be challenged?

The substance and the procedure of decisions. Signup and view all the answers

Why do statutory and common laws vary across different states?

Local legislative bodies enact laws based on specific needs. Signup and view all the answers

How do courts determine common law?

By referencing precedents and adapting them. Signup and view all the answers

What recent change occurred regarding the power of federal regulatory agencies?

The Supreme Court altered its long-standing view on their authority. Signup and view all the answers

What does it mean for Carnegie Steel to be a 'fully integrated corporation'?

It controlled all aspects of steel production from raw materials to finished products. Signup and view all the answers

What was a potential outcome of the intense competition in late 19th century America?

Widespread market stabilization through coordination or mergers. Signup and view all the answers

Why did corporations shift from competition to consolidation?

To eliminate destructive price wars and improve efficiency. Signup and view all the answers

What historical events often triggered merger waves in the U.S.?

Periods of economic change such as industrialization and financial booms. Signup and view all the answers

What was a result of the evolutionary progress of antitrust law in the United States?

Strengthened rules against monopolies and unfair trade practices. Signup and view all the answers

How did the Great Depression affect the federal government in the 1930s?

It forced the federal government to create jobs and stabilize the economy. Signup and view all the answers

Which agency was established in the 1930s to regulate securities?

Securities and Exchange Commission (SEC). Signup and view all the answers

What distinguishes U.S. industry regulation from that of other nations?

It emphasizes market competition rather than centralized control. Signup and view all the answers

Study Notes

A Short History of Financial Deregulation in the United States

Glass-Steagall Act (1933): A law enacted during the Great Depression to separate commercial banking ( taking deposits and making loans) from investment banking ( trading and securities). This was meant to prevent banks from taking excessive risks with depositors' money.

Repeal of Glass-Steagall: Happened in 1999 with the Gramm-Leach-Bliley Act. IT allowed banks to combine commercial and investment activities again, which some argue contributed to the 2008 financial crisis.

Background Summary:

Early financial regulation included caps on interest rates to protect borrowers
The Federal Reserve System was created in 1914 to stabilize the economy, control money supply, and prevent baking cruises
The Great Depression brough stricter regulations, such as the Glass-Steagall Act, Which separated banking activities and created deposition insurance to protect consumers

This section highlights how regulation evolved to address past crises like the Great Depression. It shows the balancing act between controlling financial risk and fostering innovation Early regulation were reactive, responding to specific crises setting the stage for later deregulation efforts.

Removing Interest Rate Ceilings

Regulation Q, in 1933, capped interest rates on saving accounts
In the 1970s, inflation made these caps problematic, leading to their removal under Depository Institutions Deregulation and Monetary Control Act of 1980.
Spurred growth of new financial produce like money market funds, which offered higher returns without restrictions

The removal of interest rate ceilings encouraged competition among financial institutions but also led to riskier financial practices. This deregulation shifted the financial landscape, allowing innovative produce to thrive while increasing system risks.

3. Repealing Glass-Steagall

Summary:

The Glass-Steagall Act prohibited banks from engaging in both commercial and investment banking.
By the 1980s and 1990s, banks lobbied to repeal it, arguing that it hindered their competitiveness in a global economy.
The Gramm-Leach-Bliley Act of 1999 repealed Glass-Steagall, allowing banks to diversify and merge.
Critics argue that this deregulation contributed to the 2008 financial crisis by enabling risky banking practices.

Analysis:

Repealing Glass-Steagall was a turning point, signifying a shift toward deregulation and greater consolidation in the banking industry. While it boosted the competitiveness of U.S. banks, it also blurred the lines between different types of banking activities, creating potential for conflicts of interest and systemic risks.

4. Hands-Off Regulation

Summary:

The 1990s saw a surge in new financial instruments, particularly derivatives, which posed challenges for regulators.
Efforts to regulate derivatives were resisted by powerful financial interests and government officials.
The Commodity Futures Modernization Act of 2000 exempted derivatives from regulation, contributing to the buildup of systemic risks in the financial sector.

Analysis:

This section underscores the risks of minimal regulation in complex financial markets. The hands-off approach enabled rapid innovation but also allowed hidden risks to accumulate, ultimately contributing to financial instability, as seen in the 2008 crisis.

Derthick and Quirk chapter from Politics of Deregulation

The Politics of Deregulation explores how and why significant deregulation occurred in the U.S. during the late 20th century. The article examines the roles of political leadership, independent regulatory commissions, and economic analysis in driving reforms. It highlights how deregulation was made possible by a combination of public support, expert advocacy, and institutional dynamics, while also addressing the challenges posed by interest groups and the fragmented U.S. political system.

Role of Independent Regulatory Commissions:

Commissions like the Civil Aeronautics Board (CAB) and Interstate Commerce Commission (ICC) led reforms by using their broad statutory powers to bypass Congressional gridlock.

Importance of Economic Analysis:

Economists provided evidence-based arguments for deregulation, showing how regulations created inefficiencies and raised costs without benefiting the public.

Political Leadership and Timing:

Leaders like President Ford and Senator Kennedy prioritized deregulation when public and political conditions were favorable.

Public Support and Symbolism:

Rhetoric like "cutting red tape" helped gain public backing by framing deregulation as a way to lower prices and reduce government interference.

Challenges to Reform:

Industries and labor unions opposed deregulation, but fragmented organization and strong public support weakened their resistance.

Examples of Deregulated Industries:

Airlines: Lower fares and more competition.
Trucking: Competitive rates and routes.
Finance: Removal of interest rate caps but increased risks.

Vietor article, “Regulation American Style,”

The New Deal established government oversight in sectors like banking, transportation, and labor, addressing market failures and creating safety nets.

1. Historical Foundations of Regulation

Regulation began during the Progressive Era (early 20th century) to control the economic and political power of monopolies and large corporations.
The New Deal of the 1930s expanded regulation to address market failures and stabilize industries like finance, transportation, and labor during the Great Depression.

2. Criticism of Regulation in the 1970s

By the 1970s, regulation faced growing criticism for being inefficient, outdated, and burdensome, particularly in industries like transportation (airlines and trucking) and energy.
Overregulation was linked to rising costs, stifled innovation, and inflationary pressures, prompting calls for reform.

3. Shift to Deregulation

Deregulation emerged in the 1970s and 1980s to address inefficiencies and enhance global competitiveness.
Key sectors like airlines, trucking, telecommunications, and finance underwent significant deregulation, aiming to:
Lower consumer costs.
Foster competition and innovation.
Reduce government interference in the economy.

4. Role of Consumer and Environmental Movements

Social movements in the 1960s and 1970s expanded the scope of regulation beyond economic issues to include environmental protection (e.g., Clean Air Act) and consumer safety.

5. Consequences of Deregulation

Positive Outcomes:
Increased competition led to lower prices and greater innovation in many industries.
Negative Outcomes:
Job losses due to industry restructuring.
Industry consolidation, which sometimes reduced competition over time.
Financial instability caused by the removal of safeguards, such as interest rate caps.

6. Regulation in the 21st Century

The article suggests that deregulation created both opportunities and challenges. While it modernized industries and fostered competition, it also highlighted the need for balanced oversight to prevent systemic risks.

Takeaways

Regulation in the U.S. evolved to address economic and social issues, but its rigid structure eventually faced backlash.
Deregulation brought economic benefits but exposed industries to new vulnerabilities, such as financial crises and market monopolization.
Balancing regulation and market freedom remains a central challenge for policymakers.

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Description

Explore the timeline of financial deregulation in the United States, starting with the Glass-Steagall Act of 1933 and its repeal in 1999. Understand how these changes have influenced the banking system and contributed to financial crises, emphasizing the balance between regulation and risk. This quiz provides insights into the impact of historical financial laws.