9 August 2016(updated)
Hello, again Insights.
From 2007-2009, there was the financial collapse of the global economy. It was called the Great Recession. Although it has taken many years, it appears that we are out of the recession even though the Global Economy still isn’t great. Some concerns have arisen that another, an even greater economic crash could hit. Could it happen? Let’s break it down.
The economies of nations are tied together even tighter due to the rise of globalization, which is the interaction of governments and companies of different nations. The “Information Age” started in the 1970s and over time, information technologies have allowed greater communication of different economies. The world’s nations are now like dominos. If one falls, a chain reaction will start.
Part 2: How did we get to this?
The financial sector faced minimal regulation. For example, the United States Congress in 1999 passed the Gramm-Leach-Bliley Act, which deregulated Wall St. and put commercial and investment banking back together. Glass-Steagall, a financial regulation bill in response to the Great Depression, was partially repealed. With this, banks can make riskier bets with depositor money. The firewall set by Glass-Steagall made sure banks could only make safe investments with depositor money. Bankers could now make higher-risk investments. A reduction in capital gains taxes was another factor into higher-risk investments. Lower taxes on upper income leads to higher speculation.
Part 3: The Aftermath
After the crash, austerity measures were passed in mainly European countries. Austerity is an economic process whose goal is to reduce budget deficits and thus cut debt. In a time of economic downturn, a government may pass stimulus measures to kickstart the economy again but results in higher budget deficits. The United Stats registered a budget deficit of over $1 trillion by the end of George W. Bush’s term and continued under Obama’s first term.
Part 4: What has happened since?
You may not hear this from mainstream outlets, but there hasn’t been much reform since. In 2010, the Dodd-Frank Wall St. Regulation Bill was passed and signed into law. It has been called the strongest Wall St. reform bill since the Great Depression. Don’t be fooled by the rhetoric, though. For starters, Glass-Steagall doesn’t return. To be fair, there was a section in the bill that was similar to Glass-Steagall, but not strong enough. It prohibited banks from making speculative investments where there could be a risk for depositors. Unfortunately, lobbyists were able to make amendments to it which weakened the Volcker rule.
Money in politics is the recurring theme. Chris Dodd and Barney Frank, the bill’s namesakes, have taken Wall St. money. Frank even bragged about taking the money and claimed that the Democrats have to “play ball” as well with Wall St. The bill was ineffective because of the money influencing the politicians.
Part 5: The Verdict.
Here at Global Insight, we get down to the facts. Big banks are increasing in size, and they failed at the same things that they are doing now. But here’s the thing: They know that they can get bailed out by the taxpayers because they would make an even greater dent in the economy should they fail and not get bailed out. There’s effectively no regulation on the banks. Dodd-Frank just appeared to be a good Wall St. reform bill. Low tax rates lead to more speculation. Enacting an updated version Glass-Steagall will help prevent another economic collapse of America.