After the financial crisis, governments staved off a second Great Depression - too well. This triumph let them duck tough reforms. Until now.by Barry Eichengreen / January 22, 2015 / Leave a comment
Published in February 2015 issue of Prospect Magazine
There is much disappointment over the reach of financial reform in the wake of the financial crisis. Legislation passed in the United States since then, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was weak soup by the standards of the 1930s. In 1933, in response to the banking crises of the Great Depression, the US went much further. It imposed a sharp separation between commercial and investment banking activities with the Glass-Steagall Act. That forced banks that took deposits from customers to divest their security-underwriting businesses which could threaten those savings. Federal deposit insurance, another sharp break with the status quo, was extended in 1933. The Securities and Exchange Commission (SEC) was created in 1934 to oversee financial markets, rejecting the fiction of self-regulation.
Reform in the United Kingdom and Europe was generally slower, the UK and other European countries not experiencing banking and financial crises quite as severe as those of the US. But in the UK and Europe, as in the US, the regulatory environment for banks and securities markets that emerged from the Second World War was strict and demanding.
In the absence of more far-reaching reform, pre-2008 risks and vulnerabilities are still out there.
In contrast, no comparably tough financial reforms were undertaken after the recent crisis. Our banks remain undercapitalised and our financial markets vulnerable. The spectre of a Greek exit from the euro creates fears that other countries could follow, straining banks across the eurozone. Worries are mounting about whether companies in emerging markets can repay what they have borrowed, including from banks and securities markets in Europe and the US. Financial markets in the US and UK may be buoyant for the moment, but no one knows how they would react to a shock from Greece, from emerging markets or from elsewhere, given the untold trillions of dollars of exposures to derivative securities still circulating under the regulatory radar. In the absence of more far-reaching reform, pre-2008 risks and vulnerabilities are still out there.