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as many of the laws that governed how banks could merge, compete, account, and trade were either crippled or outright repealed.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.
Article comments
1 - troll
...another clear educational read from this author - thanks and I look forward to part 2
2 - Dr. Joseph S. Maresca
The Section 8 Housing should have been increased during the first years of 2000. The reason for this is that Section 8 Housing provides the necessary shelter without the risks of providing people with mortgages that cannot be paid in any event. With regard to derivatives, we need an enhancement to the Uniform Commercial Code which defines things like a check or draft and provides for duties, obligations, recourse, risk of loss and other appropriate measures. If we can put this much regulation into a check, why not protect consumers by regulating derivatives through the prism of the Uniform Commercial Code (UCC).
Another important reason for updating the UCC for derivatives concerns the reliance Courts place on statute in order to make legal decisions. Right now, much of the derivatives regulation is interpreted by reference to the derivatives contract and counterparty experts. Essentially, the public is left out of contracts constructed for derivative transactions.
3 - Dr Dreadful
Dr Joe, Section 8 (officially called the Housing Choice Voucher Program) is one of the best and most robust federal social programs, and also one of the most egregiously underfunded. You're absolutely right that it's an underused tool.
Its major weakness (other than the fact that demand for vouchers far, far outstrips their availability) is that it's traditionally been very much a one-size-fits-all program. Housing authorities and agencies (PHAs) have struggled to find creative ways to make their limited voucher dollars stretch in the face of Section 8's very exacting rules and performance measures.
Over the past few years HUD has been trialing an initiative called Moving to Work, which relaxes some of the program regulations and allows PHAs to tailor the way they administer Section 8 (and its uncle, Low-Income Public Housing) to be more efficient and better suited to the needs of the particular populations they serve.
There are currently about 35 PHAs across the country running Moving to Work, of which the agency I'm employed by in San Diego is one. Expect to hear a lot more about this exciting initiative over the next few years - especially if the current political climate in which "hands-off government" is a buzzword persists.
4 - bill
More section 8. Yes. Right next door to each of you.