How U. S. Banking Deregulation Resulted in the Greatest Financial Crisis since the Great Depression

How U. S. Banking Deregulation Resulted in the Greatest Financial Crisis since the Great Depression

Executive Summary

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The paper will be introduced by means of the introductory page. Following the introduction is the discussion of the historical background of the Great Depression. Second, the nature of the U. S. banking deregulation will be discussed in order to fully understand the effects of the banking deregulation. Third, the ill-effects and the mechanism of the banking deregulation will be tackled. Lastly, the conclusion closes the paper.


There is no doubt that the description of the economic condition of the U. S. economy is economy in turmoil. Although government leaders and many people are optimistic during these trying times, facing the truth with wisdom is still necessary. What happened during the Great Depression may be different for what occurred today, but the possibility of survival needs a careful analysis of the past. The economic downturn experienced by the country nowadays is very alarming since the number of people who were affected in it is increasing.

 The term that was coined in this paper in relation to U. S. economy is simple, and that is financial crisis. There is no definite and progressive pattern of cash flow because many business establishments are eventually losing their profits and capital. In effect, many people are suffering because companies are laying-off workers and employees making the unemployment rate burgeoning (McInerney, 2005, p. 1). Hence, jobless citizens are looking for alternative sources of income in order to survive.

This research study will discuss how U. S. banking deregulation resulted in the greatest financial crisis since the Great Depression. The author of this paper submits that the implementation of the U. S. banking deregulation resulted to worst economic downturn since the Great Depression. Thus, the U. S. banking deregulation is not an effective government policy for economic development and progress.

U. S. and the Great Depression: Historical Background

The scenario of the Great Depression is very bleak compared to what we have today. However, if the current situation could be fixed by our political leaders in time before its collapse, then the Great Depression within the year 1929 up to 1933 would not cone into the surface again. In October 1929, it was reported that the stock market had gone down, eliminating out 40% of the paper volumes of common stock (Nelson, 2008, p. 1). Subsequent to the collapse of the stock market, industry leaders and political figures proceeded to feel optimistic despite the swerving economic condition. To the dismay of the whole American population, the Depression deepened resulting to the loss of confidence and hope of the people. Many Americans suffered financial burden because they lost their life savings (Moss, 2008, p. 1). It was in the year 1933 that the value of the Stock Exchange in New York decreased five times of what was its value in the year 1929. The usual scene of Depression happened wherein closure of business establishments is common and shutting down of factories continued. Banks are closing and many people become jobless.

Some financial analysts at that time tried to figure out what was happening in the economy of the country. They tried to single out each cause or reason of the emerging Great Depression. According to researchers, the primary problem that caused the Great Depression was the wide disparity between the capability of the people to consume and the great production capacity of the country (Nelson, 2008, p. 1). In other words, there is more production compared to buyers or consumers of any product. The question in this case is the purchasing capacity of every American. During and after the war, huge innovations in production techniques were applied by industries which resulted to the increase of output of industry. That situation was beyond the purchasing power of American farmers and salary earners.

In addition, employees and wage earners tried to invest their hard-earned money and hoped for increase in their savings. Hence, the investments of the rich and middle class, growing far beyond the potential of proper investment, had been strained into anxious assumption in stocks or real estate (Nelson, 2008, p. 2). Consequently, the stock market disintegrates and had been purely the first of quite a lot of detonations in which a fragile formation of speculation had been lowered to the ground (Nelson, 2008, p. 2).

There are many speculations as to the causes of the Great Depression in the United States. The presidential campaign in the year 1932 is full of debates as to the reason why the Great Depression caused turmoil to the country. The presidential candidates like Herbert Hover and Franklin Roosevelt presented different speculations in relation to the causes of the economic turmoil. Yet, the people chose Roosevelt over Hoover to lead the country that was marred by tremendous economic and political challenges.

There are two deals presented by Roosevelt at the height of the Great Depression, and these are the New Deal and the Second New Deal. The New Deal just presented kinds of social and economic reform patterned on the way Europeans handle economic problems (Nelson, 2008, p. 2). The said political action by Roosevelt is too lame which resulted to the state of paralysis of the banking and credit system (Nelson, 2008, p. 2). In the year 1933, the unemployment rate increased and the economy is becoming worse. There is a truth on the popular song which asked anyone for a dime. This problem was solved by an early step which is the establishment of the Civilian Conservation Camp wherein 18 to 25 years old young men were allowed to work with pay on projects like conserving coal and other natural resources, planting trees, elimination of stream pollution, creation of bird and fish sanctuaries, and fight against soil erosion (Nelson, 2008, p. 2). Aside from that, agricultural problems also happened in the country because farmers planted soil-depleting crops. The solution of the problem is legislation wherein government subsidies for farmers who no longer plant soil-depleting crops (Nelson, 2008, p. 2). The new act likewise provided loans on surplus crops, insurance for wheat and a system of planned storage to ensure a stable food supply. Soon, prices of agricultural commodities rose, and economic stability for the farmer began to seem possible. The said legislation likewise offered loans on excess crops, insurance for wheat and a scheme of designed storage to make sure of a stable food supply (Nelson, 2008, p. 2). Later on, prices of farming commodities increased, and economic firmness for the farmer began to seem possible.

With respect to The Second New Deal, it was reported that it was not a vehicle to eliminate the Depression (Nelson, 2008, p. 3). There were many people who rallied behind those who fought against the slow recovery from the economic downturn. In the face of these pressures from left and right, President Roosevelt backed a new set of economic and social measures. Prominent among these were measures to fight poverty, to counter unemployment with work and to provide a social safety net.

There are problems that exist during the Great Depression which was countered by different legislations by the United States government. These solutions may not be applicable on what is happening right now in the American economy but we can surely learn some lessons in it.

Effects of U. S. Banking Deregulation in the Economy

We are inclined to study the effects of the banking deregulation in the economy because we are aware that banking deregulation is the basic reason why the economy dwindled. Knowing the details of the problem is the main purpose of this paper then. In order to better understand the problem, studying the U. S. banking deregulation system is a must prior to any discussions of its effects in the U. S. economy.

U. S. Banking Deregulation

Banking deregulation in the United States tremendously happened from the year 1980 up to the present. The results of deregulation include the heightened competition and the merger of the banking and financial industry in the United States of America. The existence of myriad deregulation legislations caused adverse effects to the economy since then. Many banks started to compete with each other including other financial organization as caused by the elimination of interest ceiling rate rules. Other causes include the presentation of interest-bearing checking accounts or otherwise known as NOW accounts as well as the decreased geographic market limitations (Morris, 2008, p. 1). The rule changes and their suggested effects were legitimated on the basis of the neo-classical economic hypothesis that deregulation would boost competition and decrease inefficiencies through the removal of weaker banks (Morris, 2008, p. 1). In other words, the reduction of legal limitations to entry, and industrial advances that aided the
establishment of other monetary institutions as competitors, were pro-competitive structural development that may be allowed as increasing competition and by this means
lessening the bar for mergers. All these things affect the banking system of the country thereby making weaker banks to strive more.

Later on, the abovementioned regulations resulted to changes like establishing the consolidation of the banking industry, principally through mergers (Morris, 2008, p. 2).  For instance, the quantity of mergers improved from 138 in 1976 to 567 in 1998, a 300 percent increase (Morris, 2008, p. 2). Aside from that, the amount of autonomous banks in the United States lessened by nearly 60 percent within the era, from 14,410 unit banks in 1976 to 8774 in 1998, with such consolidation mainly because of mergers happened in the financial system (Morris, 2008, p. 2).  Nonetheless, what has been taken for granted is the examination of whether or not the assumption that this consolidation existed because the abolition of financially weak banks by financially strong banks is correct.

Even though research studies on mergers contributed to increase our understanding of those organizational distinctiveness linked with being the goal of merger or the acquirer in a merger, there is a little effort to comprehend the circumstances under which mergers exist for both the acquiring group and the target group of mergers (Morris, 2008, p. 3). As patterned on the theories of neo-classical economics, any person would presume that, the particular deregulation that happened in the banking business, the acquiring banks are economically tough, while the target banks are economically weak. On the other hand, utilizing sociological knowledge gained from organizational theory to direct our perceptions of organizational alteration, there is an option on clarification of consolidation in the banking business (Morris, 2008, p. 3). This clarification is linked on the claim of institutional theory and reserve dependence theory to the query of bank mergers, signifying that mergers occur when merger is legalized as a policy for banks to chase and when both the acquirer and target banks in a merger solve outer crises of indecision and interior monetary crises. Hence, the past thirty years is a specific practical occasion to scrutinize bank merger as banks have been entrenched within an aggressive political-economic environment, distinct by incredible deregulation and the reduction of rules of merger.

In order to have a perspective on what happens while deregulation is at the helm, the following table is shown. It was Michael Chossudovsky who presented the Percentage Date Decline of the economy based in New York Stock Exchange.

Percentage Date Decline [1929-1998]

October 19, 1987 – 22.6%

October 28, 1929 – 12.8%

October 29, 1929 – 11.7%

November 6, 1929 – 9.9%

August 12, 1932 – 8.4%

October 26, 1987 – 8.0%

July 21, 1933 – 7.8%

October 18, 1937 – 7.6%

October 27, 1997 – 7.2%

October 5, 1932 – 7.2%

September 24, 1931 – 7.1%

August 31, 1998 – 6.4%


            In the year 1987 and during the month of October, financial crises occurred in the United States (Chossudovsky, 2009, p. 1). Ten years later, the same economic downturn happened which largely affected the economic development of the country. In the year 1997 up to the present, more economic problems happen which gives us reasons to examine the effects of banking deregulation in the economy of the United States of America.

Economic Effects of U. S. Banking Deregulation

Based on the discussions mentioned earlier, it is undeniable that banking deregulation caused the economic downturn of the economy. In this section, we will discuss the economic effects of U. S. Banking Deregulation. Many research writers are trying to call for regulation in the banking industry. One researcher mentioned that the cause of the economic downturn is the deregulation of banking industry (Nader, 2008, p. 3). The Security Exchange Commission, by means of its consolidated supervised entities program, determined that intentional regulation would be effective for the improvement of the investment banking sector.

The researcher is not also surprised that this plan affected Wall Street itself. The savings banks were allowed to double, triple and go twenty times and greater down on their bets by utilizing more borrowed money (Nader, 2008, p. 3). They had done lesser reports to the Security and Exchange Commission about their activities, and the Security and Exchange Commission did not worry to evaluate those reports sufficiently (Nader, 2008, p. 3). Now, this is the real scenario, investment banks made various bad bets to our disadvantage. Hence, this is the right time to pay close attention to the government officials who are involved with the deregulation problems. The active political participation of the people through formation of public opinions could help in fixing out these troubles in the economy.

Going back to the Bush administration, there were many struggles behind the financial and consumer-protection regulation. The reason behind the situation wherein the stock market was tanking is the bitter fruits of banking deregulation. The situation is basically the breaking up of $1.3 trillion sub prime crisis mortgage industry which currently accounts for single mortgage in three (Kuttner, 2007, p. 1). With that, there is a need to support for the regulation of the banking industry.

There are myriad reasons why the banking industry must be regulated. In the earlier period, as legislators thrown away the rules, sheltered mortgage banking organizations, supported by the bluest-chip establishments on Wall Street, designed that money is earned presenting bait-and-switch mortgages to underprivileged financial risks (Kuttner, 2007, p. 1). Defaulting accounts and foreclosure charges would be larger, yet advanced profits would more than recompense for the risks (Kuttner, 2007, p. 1). As a result, sub prime mortgage business, allowed by the huge banking organizations created sham gimmicks. These integrated not only variable-rate mortgages, but mortgages that were originally interest only, mortgages with preliminary mystery rates, mortgages with no losing expense (Kuttner, 2007, p. 1). In that case, there will be no income verification that is required. Besides, there is also no financial situation check. Sub prime participants besieged inhabitants with terrible credit histories and families anxious for housing who could not pay the debt they applied with. In the year 1997, 60 percent of sub prime loans need no significant documentation (Kuttner, 2007, p. 1).

Let us check what will happen next based on that processes. As advanced expenses kicked in, people could not pay them. Defaults tremendously increased, to an expected 13% of all such loans (Kuttner, 2007, p. 1). With that, there are at least twenty five sub prime lenders who have stopped doing business. The economic figures on Wall Street, who had utilized money in the sub prime participants, took a huge hit, too. It is not apparent where all these things would end. Imagine that various low-income families will loose their homes. Guiltless investors will experience the spillover possessions on the stock market and universal mortgage rates may increase to pay for these fatalities of thoughtless conjecture. Yet, we have to ask: was it not these sub prime lenders performing positive works by allowing low-income borrowers to own homes? If the objective is to endorse low-income home ownership, there are other ways that do not place financial markets at risk and do not allow individuals to loose their homes after some time. If the government were serious about giving opportunity for first-time homeownership, they should offer subsidized, low-rate mortgages, as the U. S. government did in the Great Society era, prior to Reagan and the Bushes devastated societal expenditure (Kuttner, 2007, p. 1).

The worst scenario is that, the sub prime mortgage industry had intention for the homebuyer to avoid risk for the purpose of making large amount of money. From the time the intelligent businessmen from the Wall Street created “securitization” of mortgage loans, a mortgage business organization with small capital at from loans and trade them off to middlemen who transformed them into bonds (Kuttner, 2007, p. 1). Together with the mortgage company, the middlemen will earn money on the transactions, and some fortunate investor comes up with the bonds and the risks. These circumstances caused the burden of low-income families and investors that are affected by the said destructive scheme.

Here is another realization of the effects of banking deregulation. The dilemma later happened that banks had more funds than they had mortgages. To that effect, between the years 2002-2003, businessmen started the primary development of sub prime. Essentially, the Wall Street which securitized sub prime by means of Mortgage Backed Securities, observed the expansion of real estate (Volpe, 2008, p. 1). They began taking more notice of a product that had not been in favor since the early 1990’s (Volpe, 2008, p. 1. But there was a problem at Wall Street, a contented dilemma at that. The businessmen had completely no difficulty in the promotion of the bonds. In other words, advertising these bonds was very effortless. That means, funds was being laid on the table. And why is that? This was a zenith of numerous factors.

In the year 1999, there was banking deregulation bill that broke down the metaphorical wall between banking institutions and monetary services organizations (Volpe, 2008, p. 1). It permitted banking institutions and other monetary services organizations to look into into each other’s businesses, together with buying MBS (Volpe, 2008, p. 1). This shaped additional players accessible to buy mortgage bonds (Volpe, 2008, p. 1). Second, the despicably small rates permitted more players admission for having money to acquire these bonds. The worst thing is that, not only were banking institutions and financial institutions utilizing the shockingly small rates to have a loan of money to fund loans, but to scrounge money to purchase mortgage bonds (Volpe, 2008, p. 1). All the investors involved in the sub prime activities used to loose money to take into each part of the business. Why not do it? There is plenty of money accessible and it was the only business that is working at the helm.

Now then, how did banking deregulation legislation throw in to revolving this mortgage crisis into a financial services crisis? That answer should be obvious if the earlier explanation was understood. Now, all kinds of fiscal institutions were liberated to take a place in mortgages, particularly sub prime mortgages. For example, Merrill Lynch purchased up four sub prime mortgage companies in the year 2006 (Volpe, 2008, p. 1). These kinds of mergers would have never been permitted before the legislation was enforced. The tragic flaw of banking deregulation bills is that it uncovered financial institutions all over the place to financial channels which they had no knowledge with. It was not simply that monetary services organizations were jumping into the blistering market, sub prime, but that they were plunging into this blistering market with small prior skill in the market.

      Finally, the crucial point to the passing of Gramm-Leach-Bliley Act was an alteration made to the GLBA, mentioning that no merger may be permitted if any of the financial holding institutions, or affiliates thereof, expected a fewer than acceptable rating at its most recent Community Reinvestment Act examination, fundamentally implies that any merger may only be allowed through stern consent of the regulatory bodies accountable for the Community Reinvestment Act (Wikipedia, 2008, p. 1). This was a subject of blistering argument, and the Clinton Administration frazzled that it would veto any bill that would level back minority-lending necessities (Wikipedia, 2008, p. 1). Recently, the government must be aware of the negative implications of banking deregulation. Without doing so, the poor masses will continue to suffer in the long run. Besides, there will be a possibility of wide disparity between the rich and the poor and economic downturn will never end.

            It is not denied that many people are suffering due to the economic downturn experienved by the people. The effects of banking deregulation destroyed the opportunity of low-income families to improve their lives. The effects of banking deregulation are long-term and needs to be studied for better recovery. The pattern of the problem is just the same for the past three decades then.

            The primary effect of the banking deregulation is the sub prime crisis. Banks allowed lending money without proper and legitimate requirements. As a result, many families who have meager incomes were able to take access of mortgage loans. Money was spent and even hoarded without sufficient securities. Hence, when the sub prime crisis intensified, many low-income families were left homeless. The unemployment rate soared and many individuals were suffering. Besides, crime rate also increased because people resort to crimes just to survive in an economy that spelled depression and crises.


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U. S. Banking Industry, 1976-1998. Retrieved April 9, 2009, from

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panic? Retrieved April 10, 2009, from


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Curtain. Retrieved April 10, 2009, from


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