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Financial meltdown

July 15, 2012

There has been a lot of debate over the cause of the financial meltdown we had a few short years ago, from which we have not recorded.   I think our the basic causes are two. Improvements in technology have reduced the demand for labor, and global competition has caused us to lose much of out manufacturing jobs, as well as many of our white collar jobs.    I also think that the problem was aided by the repeal of the Glass-Stegall Act. The Act prevented commercial banks from investing and buying and selling stocks in their own account, and also required banks to maintain higher reserves than are now required.  That Act was repealed.

I hear complaints about government management of our economy.  I don’t think of Glass-Stegall as government management of banks, or government interference of bank activity.. Had that regulation, or law stayed in place those losses would have been much less severe and much less damage would have been done.
There are differences in how people use terms such as bank regulation and bank management by the government.  Some people speak of regulation as management of day to day banking. I don’t see the government doing that and that is not what I mean by bank regulation.

People also blame the losses on failure of the government to enforce the rules.  Let me compare that to the food business.  Restaurants have rules about how they keep food. Inspectors come by and inspect and give them a grade. I don’t call that management of restaurants, I call it regulation.

If restaurants fail to follow the rules and serve you contaminated food, you don’t get sick because of the inspectors failure to spot something, you get sick because the restaurant didn’t follow the rules. Same with banks if they lose money and lose their depositors, their investors, and their own money.  Because they did not follow the rules and regulations.

Some of the things the banks did that caused the meltdown were not even illegal. But they should have been. That means the losses occurred because of the lack of laws (such as Glass Stegall) that should have been in place to regulate their activity.    That would be government regulation by not management by the government. 

Let’s hope we can do better in the future.

From → Observation

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