Canada and the World
Current Events with a Canadian Perspective
Last update
09 December 2010
Weakened Banking Rules
Led to 2008 Financial Crisis
Irresponsible lending and a failure of
watchdogs are behind the Great Recession
Wild and largely uncontrolled speculation brought about the stock market crash of 1929. Fortunes were lost in a few hours, banks failed, and small investors lost their life savings. The crash brought on the Great Depression that lasted for most of the 1930s.
One of the reactions to the collapse on Wall Street was the Glass Steagall Act of 1933. The Act of the U.S. Congress was aimed at putting a stop to “improper banking activity.” Government bodies were set up to keep an eye on the financial industry. Inspectors and regulators made sure banks didn’t make risky investments that might threaten the money their customers put into savings accounts or stock portfolios.
Bank Regulation Eased
But, memories are short. By the 1980s, the miseries of Crash of ’29 and the Depression were mostly forgotten. The financial industry in the U.S. began lobbying government to cut down on regulation. In President Ronald Reagan (in office from 1981 to 1989) they had an enthusiastic supporter.
Mr. Reagan and Congress started to loosen market regulation. They said the rules were slowing down economic growth and choking the creative spirit of America’s business leaders. The deregulation continued and, in 1999, President Bill Clinton tore up the Glass Steagall Act. George W. Bush and his administration have been among the most fervent deregulators.
Under Mr. Bush interest rates for people who borrow money were cut to historic lows. Folks who previously had no hope of owning their home were now persuaded they could afford to buy property.
With no regulators looking over their shoulders, salespeople peddled mortgages to
the unemployed and the working poor. (Mortgages are long-
Failure of Sub-
Many of the people who took out these mortgages did not understand them; others were
flat out lied to. Most of what came to be called sub-
By the time the failures started to pile up the risky mortgages had been sold on to other people. Little bits of each bad loan were packaged up with safer debts and sold to investors. These financial packages became so complex that some of the people selling them didn’t understand them although they assured the buyers they were safe (as houses?).
Each time a package of debt was sold financial institutions collected fees. The whole scheme delivered rich returns. The big five investment banks in the U.S. racked up profits of $30 billion between 2002 and 2006.
Because of deregulation, there were few experts around to question what was going
on. But, the whole enterprise was built on debt, much of which would never be repaid.
Eventually, this became obvious to even the most dim-
Governments everywhere stepped in with bail outs now counted in trillions of dollars.
The taxpayer money paid out to shore up shaky banks has brought some countries, such
as Ireland, to the brink of collapse.
And, despite fierce lobbying from the financial industry, re-
© Canada and the World, December 2010
All rights reserved
“Trade is much superior to piracy. You can rob and kill a man but once, but you can cheat him again and again.”
American author Louis L’Amour in The Walking Drum
When stocks plunged on the New York Stock Exchange in October 1929 anxious crowds gathered outside. Between 1929 and 1932 the value of shares fell by 89 percent.
BANKER’S BONUSES
American International Group (AIG) was one of the many financial institutions that
helped cause the 2008 crisis and subsequently received bail-
In March 2009, AIG announced it was paying out $218 million in bonuses to employees in its financial services division.
“The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March [2009].”
Al Yoon, Reuters News Service, August 2009