While the vast majority of individuals, both in America and abroad, are concerned (to put it lightly) over the economy, and are beginning to familiarize themselves with issues related to the financial crisis, a demystification of how the meltdown happened is necessary to ensuring that situations such as these are prevented in the future. Possibly the best method of explaining the economic crisis is to start with regulation.
Perhaps one of the most integral events that allowed the banking and economic crisis to occur was action taken by former United States Senator William Philip Gramm. He has been referred to as the ‘high priest of deregulation”[i] of the financial markets and lead efforts to pass the 1999 legislation known as the Gramm-Leach-Bliley Act. The Act, also known as Gramm-Leach-Bliley Financial Services Modernization Act[ii], is most widely credited with repealing certain portions of the Glass-Steagall Act[iii], and allowed investment banks and commercial banks to consolidate.
Some believe, rightly so, that this act was partly to blame for the subprime mortgage crisis and the current economic crisis. [iv][v] Then, a year later, the Commodity Futures Modernization Act of 2000, also spearheaded (or at the very least sponsored) by Former Senator Gramm, was passed. This act is credited by some with allowing the Enron Scandal to occur[vi] and prevented the government from regulating derivative transactions, including credit default swaps[vii], which ultimately led to the financial debacle we currently find ourselves in.
Also, through other legislation that was passed in 1999, certain companies could select the Office of Thrift Supervision (hereinafter OTS) as their regulator, as long as they owned at least one thrift (commonly called savings-and-loans). This allowed insurance giant American International Group (hereinafter AIG) to choose the OTS (a small agency by comparison to the Securities and Exchange Commission) to regulate them after purchasing a single thrift in Delaware.
This legislation allowed an agency with only one insurance specialist on staff to regulate the largest insurer in the world. It logically follows then that something would be overlooked. The combination of these acts paved the way for banks to purchase credit default swaps and the lack of regulation allowed freeing up of assets to run ramped.
[i] Paul Krugman (2008 Nobel Laureate in Economics)
[ii] http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=106_cong_public_laws&docid=f:publ102.106
[iii] Legislation that came out of the Great Depression era and established the Federal Deposit Insurance Corporation (FDIC) and kept banking, insurance and brokerage activities separate. The first Glass-Steagall Act was the first time that currency was allowed to be allocated to the Federal Reserve System. The second Glass-Steagall Act, known as the Banking Act of 1933 was responsible for the FDIC and bank separation. http://en.wikipedia.org/wiki/Glass-Steagall_Act#cite_note-7
[v] Matt Taibbi: The Big Takeover. The Rolling Stone, April 2, 2009 Issue
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