Politicians who refuse to recognise the causes of the disastrous global financial crisis of 2008 are likely to allow them to happen again. Here are four key lessons which must not be forgotten:
[1] Bankers’ Greed & Irresponsibility
When savers deposit their money with banks, the latter are supposed to hold that money plus any agreed interests until a withdrawal request is made. But in the period 2006-2008, many banks (in the US and in a number of European countries though, as we will see below, with notable exceptions) increasingly used their savers’ money to make high risk investment which would inevitably collapse. When they were hit by the colossal losses (stemming from deeply flawed subprime mortgage packages), millions of people across the world were in danger of losing their life savings, and different national governments had to step in to provide funds to prevent that from happening. It was covering the losses made by irresponsible corporate gamblers in the banking sector, and not funding much needed public services, that led to the crisis and subsequent drain on public resources.
[2] The Need for Regulation
Is the problem of allowing financial companies to risk savers’ money an unforeseeable one? In the 1920s, American banks used savers’ money to gamble on the stock bubble which burst and led to the Great Depression of the 1930s. To prevent this kind of disaster from recurring, the US Congress passed the Glass-Steagall Act of 1932 to bring in safeguards which would, amongst other things, stop financial companies from risking the loss of savers’ money in making investment that could fail. In the UK, institutions licensed to accept savings were kept from being able to use those deposits to invest in deals that should be left to merchant banks. However, by the 1980s, ideological deregulators were pushing to give bankers the freedom to make money irrespective of the risks to the general public. In 1986, Margaret Thatcher’s Conservative government lifted an array of British banking regulations in a move hailed as the ‘Big Bang’. In the US, the Federal Reserve Board (under Ronald Reagan’s administration) began to reinterpret banking regulations as loosely as possible, until the Republican Congress passed the Gram-Leach-Bliley Act of 1999 to formally repeal the Glass-Steagall Act. By 2000, it was wide open for banks in the US and the UK to gamble with their savers’ money – since they either make even more profit for themselves, or they make huge losses and ask to be bailed out by their government.
[3] The Problem with ‘Free Market’ Regulators
‘Free Market’ advocates like to argue that the 2008 financial crisis had nothing to do with deregulation, but with poor handling of issues by regulators. What they would not admit to is that, not only had a robust regulatory framework been largely dismantled, but what was left was overseen by people who subscribed to the deregulation mantra. In the US, without explicit legislation to stop the Ponzi-scheme-like subprime mortgage deals, it was down to those with statutory responsibility to make the case for intervention. But in that time, who was the Secretary of the Treasury? It was none other than Henry Paulson, former Chairman & CEO of Goldman Sachs, brought into government by George W. Bush. Paulson, who was able to save himself $50 million in tax payment thanks to a provision passed under President Bush, repeatedly insisted in the years and months leading up to the financial crisis that all was well, and no action was needed. If you hand regulatory oversight to people who are inclined to keep regulation out of money-making deals – regardless of the damages they may cause – necessary intervention will most likely be left ignored.
[4] Crime, Bonus & Punishment
When banks were losing so much money that people were in danger of losing their life savings (as many did during the Great Depression), government had a choice – punish those who had acted irresponsibly and help those who could be harmed by their action, or help the culprits and punish their victims. In the UK, billions were handed to the banks (which could then pay bonuses to their top executives) while the rest of the country was subject to austere cuts. In the US, vast sums were given to the banks virtually with no strings attached, but people who lost their homes and jobs had no comparable support. Of the countries hit by the 2008 financial crisis, only Iceland tried to prioritise helping ordinary people, let the irresponsible companies go bust, and sent guilty bankers to jail. Where greed and irresponsibility are rewarded by bailouts and bonuses, instead of being punished by bankruptcy and jail, it is likely that more of the same will happen again.
Conclusion
Deregulating the financial sector makes it far more likely for a calamitous crisis to occur. Why do some people nonetheless push for it? It’s basically why ‘Free Market’ acolytes always call for deregulation – it increases the scope for unscrupulous profiteering while passes the risk of harm to the public (consumers, communities, the environment, public agencies). In cutting down regulatory safeguards, callous executives can engage in activities that generate more income for them even though it greatly increases the probability of many unsuspecting people getting financially or even physically hurt as a result. When damages are done, they will deploy top law firms to help deny their culpability, pay out if necessary compensation (which is tiny compared with the profits they have then made), or lobby the government to bail them out.
In closing, it is worth noting that Norway and Sweden were persuaded to adopt financial deregulation in the late 1980s, but after they both got burnt in the 1990s, they learnt the lesson and tightened their financial regulations again. Subsequently, they were largely unaffected by the 2008 global financial crisis. As for Denmark, which never embraced the deregulation mantra at all on the banking front, it emerged unscathed from what hit most European countries in 2008.
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