2011 U.S. Debt Ceiling Crisis

What is deregulation?

Deregulation is the reduction or elimination of government power in a particular industry, generally adopted to create more competition within the industry. Over the years, the struggle between proponents of regulation and proponents of no government intervention has changed market conditions. Finance has always been one of the most watched industries in the United States.



Understanding deregulation

Advocates of deregulation argue that authoritarian legislation reduces investment opportunities and curbs economic growth, causing more harm than it contributes. And, indeed, the American financial sector was not highly regulated before the stock market crash of 1929 and the resulting Great Depression. In response to the country’s greatest financial crisis in its history, the administration of Franklin D. Roosevelt adopted many forms of financial regulation, including the Securities Exchange Act of 1933 and 1934 and the otherwise known USBanking Act of 1933 under the name of Glass-Steagall Act.

The Securities Exchange Acts required that all publicly traded companies disclose relevant financial information and created the Securities and Exchange Commission (SEC) to oversee the securities markets. The Glass-Steagall law prohibits a financial institution from engaging in both commercial and investment banking. This reform legislation was based on the conviction that the pursuit of profit by the large national banks must have spikes in place to avoid reckless and manipulative behavior that would lead the financial markets in unfavorable directions.

Proponents of deregulation argue that domineering legislation reduces investment opportunities and curbs economic growth, causing more harm than it contributes.

Over the years, proponents of deregulation have routinely defeated these guarantees until the Dodd-Frank Act of 2020, which imposed the most radical legislation on the banking sector since the 1930s. So how did -they do?

The history of deregulation

In 1986, the Federal Reserve reinterpreted the Glass-Steagall law and decided that 5% of the income of a commercial bank could come from investment banking activity, and the level was raised to 25% in 1996. The following year, the Fed decided that commercial banks could engage in underwriting, which is the method by which companies and governments raise capital in the debt and equity markets. In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed, amending the Bank Holding Company Act of 1956 and the Federal Deposit Insurance Act, to allow banking and interstate branches.

Later, in 1999, the Financial Services Modernization Act, or Gramm-Leach-Bliley Act, was passed under the leadership of the Clinton administration, completely annulling the Glass-Steagall Act. In 2000, the Commodity Futures Modernization Act prohibited the Commodity Futures Trading Committee from regulating credit default swaps and other over-the-counter derivative contracts. In 2004, the SEC made changes that reduced the proportion of capital that investment banks must hold on reserve.

This wave of deregulation, however, came to an abrupt halt after the subprime mortgage crisis of 2007 and the financial crash of 2008, notably with the passage of the Dodd-Frank Act in 2020, which restricted lending subprime mortgage and derivatives trading.

However, with the 2020 U.S. election carrying both a Republican president and the ruling Congress, President Donald Trump and his party plan to dismantle Dodd-Frank. In May 2020, President Trump signed a bill that exempts small regional banks from the most stringent Dodd-Frank regulations and relaxes the rules put in place to prevent the sudden collapse of large banks. The bill was passed by both houses of Congress with bipartisan support after successful negotiations with the Democrats.

President Trump had said he wanted to “make a big number” on Dodd-Frank, maybe even repeal it completely. However, Barney Frank, his co-sponsor, said of the new legislation: “It’s not a” big number “on the bill. It’s a small number. Legislation has left Dodd-Frank’s main rules in place and has made no changes to the Consumer Financial Protection Bureau (CFPB), created by Dodd-Frank to monitor its rules.

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