For America’s financial institutions, 2008 should have signaled the end of the deregulatory era. Beginning in the 1980s, firms were allowed to operate with increasingly less oversight from federal regulators as many of the laws that governed how banks could merge, compete, account, and trade were either crippled or outright repealed. The prevailing logic was that financial markets had evolved to a level of sophistication that government intervention was a disruptive intrusion into an otherwise functioning system. It was believed that major financial panics like the Depression of the 1930s could be avoided completely, a view seemingly validated by the rapid economic prosperity witnessed between 1989 and 2007. But in 2008, a sudden decline in demand for, and the price of, residential homes sparked a rapid depreciation in the value of several classes of securitized mortgage derivatives, held and traded by every major financial institution in the country. Hundreds of trillions of dollars worth of derivative contracts went from liquid assets to toxic debt overnight, prompting a wholesale retreat from said “mortgage backed securities” and bank stocks and panicked investors scrambled to move their money from banks holding “toxic assets.” In a few short weeks, markets erased their gains of the previous seven years, as the rupturing housing bubble sent America into its deepest recession in over 80 years.
In the 1930s, the onset of the Depression prompted lawmakers in Congress to reevaluate the government’s role in regulating the financial industry due to the scope and severity of the crisis. It stood to reason that the 2008 crisis would bear similar fruit, with Congress restoring the old laws to their former selves and writing new ones to handle the more complex transactions banks had conducted amongst themselves. What the American people received in exchange for nearly 1.4 trillion dollars of their tax dollars is at best a dog and pony show.The severity of the 2008 financial crisis should have prompted Congressional lawmakers to turn back the deregulatory tide that established and enabled many of the recession's primary factors. Instead, the policy response from Washington resulted in a piece of legislation that fails to truly address foundational weaknesses in the US financial system.
Taming the Toros and Protecting the Toreadores
By 2010, the American financial system had been pushed back from the precipice of collapse. Two successive bailouts, in 2008 and 2009, plus two rounds of "quantitative easing" from the Federal Reserve had managed to recapitalize ailing banks and non-bank financial companies to keep interbank lending afloat and credit markets out of the deep freeze. However, the misappropriation of bailout funds in 2008, along with the public outcry against continued financial assistance for firms on Wall Street demanded a response from the federal government. What came of it was a cumbersome piece of legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act.