The History of American Financial Regulation

Zsuzsánna Biedermann
PhD student, Corvinus University of Budapest, Doctoral School of International Relations, Research Centre for Economic and Regional Studies of the Hungarian Academy of Sciences, Institute of World Economics, Junior Research Fellow

Published in: Public Finance Quarterly 2012/3 (p. 313-331.)

Summary: From 2007 onwards, the United States has been confronted with the most severe economic recession since the Great Depression. The root causes of this crisis lie on one hand in the “erroneous” operation of the American financial markets; abundant financial innovations prior to the outbreak of the crisis led to a less transparent and thus riskier financial market. On the other hand, the system of financial market regulation itself was unable keep pace with the development of markets, and market players — exploiting the economic boom — successfully pushed for deregulation. This study outlines the major financial regulatory changes in America that created the context for the crisis; furthermore, it also details the repeal of the 1933 Glass-Steagall Act and its consequences. The Gramm-Leach-Bliley Act significantly contributed to changing the rigid logic of the originate-and-distribute model, the basis of the American economy. Several economic actors who could have signalled the mounting risks participated in the creation of a sort of “boom frenzy” (or as Raghuram G. Rajan put it “a cyclical euphoria”), the exaggerated optimism of which ultimately led to massive irresponsible financial behaviour and crisis. The study points out that the new Dodd-Frank Act passed in 2010, aimed at strengthening supervision and protecting consumers from abusive practices in the financial sector, is in itself insufficient to avert another financial crisis. The United States will have to face an even graver crisis unless it manages to find a lasting solution for regulating its financial markets in a flexible and effective way.

Keywords: financial regulation, Dodd–Frank Act, deregulation

Journal of Economic Literature (JEL) kód: G21, G24, G28

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