Deregulation: a Major Cause for the Financial Crisis of 2008
INTERNATIONAL FINANCE
Deregulation: A major cause for the financial crisis of 2008?
Professor E. Slavai
Geoffrey Delbaere
August 2013
“When you can create something out of nothing, it is very difficult to resist”
Lee Hsien Loong (Prime Minister of Singapore)
Introduction
On September 15th 2008 the investment bank Lehman Brothers was declared bankrupt. That same month AIG, the world’s largest insurance company, also collapsed. These two events led to a global financial crisis which cost 30 million people their jobs and doubled the national debt of the USA. It also caused to largest single point drop on the stock market in history. Today we can realize that this crisis was not an accident, it was caused by an out of control industry. Since the start of the 1980’s the financial sector of the USA has risen through the skies. This has led to a series of increasingly severe crises which have caused more and more damage. But this has also led to the fact that the industry has made more and more money.
The question that a lot of experts have asked themselves is: ‘What was the impact of deregulation on this latest financial crisis?’ Along with the boom of the financial sector since the 1980’s, a lot of measures have been taken to deregulate the financial markets. In my paper I wish to analyze the impact of those measures. A lot of people see this deregulation as the major cause, but a deep study also shows other causes that are more hidden for the public. First I will explain the chain of events that led to this deregulation. After that I will discuss how big the impact was of this deregulation on the financial crisis in 2008.
1) The process leading up to deregulation
After the crash of 1929, the US economy experienced 40 years of growth without a single crisis. This was due to a lot of regulation. In 1933 Congress approved the Glass-Steagall Act, or the Banking act, which prohibited commercial banks to speculate with investors’ money. This act
Deregulation: A major cause for the financial crisis of 2008?
Professor E. Slavai
Geoffrey Delbaere
August 2013
“When you can create something out of nothing, it is very difficult to resist”
Lee Hsien Loong (Prime Minister of Singapore)
Introduction
On September 15th 2008 the investment bank Lehman Brothers was declared bankrupt. That same month AIG, the world’s largest insurance company, also collapsed. These two events led to a global financial crisis which cost 30 million people their jobs and doubled the national debt of the USA. It also caused to largest single point drop on the stock market in history. Today we can realize that this crisis was not an accident, it was caused by an out of control industry. Since the start of the 1980’s the financial sector of the USA has risen through the skies. This has led to a series of increasingly severe crises which have caused more and more damage. But this has also led to the fact that the industry has made more and more money.
The question that a lot of experts have asked themselves is: ‘What was the impact of deregulation on this latest financial crisis?’ Along with the boom of the financial sector since the 1980’s, a lot of measures have been taken to deregulate the financial markets. In my paper I wish to analyze the impact of those measures. A lot of people see this deregulation as the major cause, but a deep study also shows other causes that are more hidden for the public. First I will explain the chain of events that led to this deregulation. After that I will discuss how big the impact was of this deregulation on the financial crisis in 2008.
1) The process leading up to deregulation
After the crash of 1929, the US economy experienced 40 years of growth without a single crisis. This was due to a lot of regulation. In 1933 Congress approved the Glass-Steagall Act, or the Banking act, which prohibited commercial banks to speculate with investors’ money. This act
Bibliography: * CALABRIA, M.A., Did deregulation cause the financial crisis?, Cato Policy Report, Vol. XXXI no. 4, Washington, 2009. * GRAMM, P,. Deregulation and the financial panic, The Wall Street Journal, New York, 2009. * NATTER, R., Deregulation and the financial crisis, Washington, 2012. * SCHNEIDERMAN, R.M., Did deregulation cause the credit crisis, The New York Times, New York, 2008. * Movie: ‘Inside Job’ (2010) Directed by Charles H. Ferguson. -------------------------------------------- [ 1 ]. http://www.automaticfinances.com/wall-street-regulations/