It’s now been 80 years since the crash of 1929.
That event was treated as a financial calamity but no one knew how bad it would get and how long it would stay bad.
Within just a few months, panic peddling of stocks and bonds destroyed businesses and jobs by the millions. Retirement funds were devastated, millions of ordinary Americans were impoverished and unemployment climbed to unprecedented levels. The entire world fell, or jumped, into the Great Depression.
In the years that followed, economists, politicians and Wall Street’s professionals sought to explain the crisis and assure that it wouldn’t happen again. Many blamed it on greed and Wall Street excess, especially stock market manipulators. The Wall Street firms that survived conspired with politicians to create a system that would partially cartelize and regulate the financial sector. Much of the regulation was anti-competitive by design–if you are worried about rogue operatives it makes sense to make sure only the responsible folks who play well with regulators get to run Wall Street.
Over the years, regulation after regulation would be piled on top of the original reforms of the 1930s.
- The oligopoly of the ratings agencies would grow even stronger.
- Anti-takeover measures would strengthen entrenched corporate management.
- Subsidized mortgages would become an ever larger part of our economy.
- Capital requirements would warp the internal economies of banks.
- Civil rights era laws would demand the extension of credit without regard to credit worthiness.
- Implicit guarantees of the largest financial institutions would allow them to grow in size and complexity that would never have been possible in a free market.
Layer by layer, the regulations would draw the financial sector farther away from reality.
The greatest lesson of 1929 and the Great Depression–that excess credit would distort the economy so badly that it could take years to put it back on track–was made to seem irrelevant and outdated, especially in the go-go economic climate of the new millennium.
There are frightening parallels between 1929 and 2009. Post-1929 Wall Street’s leaders more or less controlled the shape of regulation that emerged. Likewise their current-day counter-parts are fighting to control the next generation of regulation. Even something as innocuous as the consumer financial protection agency seems designed to support more bank consolidation and punish local, independent banks.
The fight over pay is largely a side show. It attracts lots of headlines but pales in significance to matters such as the role of ratings agencies and the correct structure of capital requirements. And even when those subjects are raised we’re told nonsensical lies such as the idea that it is the way ratings agencies were compensated that derailed them, that it was the repeal of Glass-Steagal that ruined banking, that the problem was unregulated markets, or that unregulated hedge funds or derivatives need to be brought to under control.
Anything but the critical matters: a credible policy of allowing market failure, better capital reserve requirements for banks and an end to overly permissive credit coming from the central bank.
Can we have banking regulation that isn’t designed by bankers or immediately captured by bankers? The historical lessons are not reassuring.