Financial regulations implemented in the past century aim to prevent stock market crashes, ensure fair treatment of customers, and deter fraudulent activities. Regulations such as Glass-Steagall, Dodd-Frank, and FDIC have profoundly influenced the US monetary, economic, and investment policies. They have played a crucial role in overseeing financial advisors, bankers, and the Consumer Financial Protection Bureau, instilling confidence in consumers and prioritizing their interests in the financial landscape.
The market's regulation is a topic that sparks various ideas. Some argue for self-regulation, while others support government intervention. A few prefer self-regulation as the best option. Throughout the years, several financial regulations have been implemented to prevent stock market crashes, ensure fair treatment of customers, and deter fraudulent activities. Let's explore the major financial regulations of the past century and their benefits to the market and individuals.
The Glass-Steagall Act of 1933
On October 29, 1929, Black Tuesday struck, leading to the Great Crash and triggering the devastating Great Depression that affected countless lives in the U.S. In response, several regulations were enacted to prevent a recurrence. One significant measure was the Glass-Steagall Act (GSA), also known as the Banking Act of 1933.
The collapse of the stock market was attributed to banks taking excessive risks with their investments, including their clients' funds. The GSA aimed to address this issue by restricting commercial banks, which primarily dealt with lending, from engaging in speculative investments. It mandated that banks could only make up to 10% of their income from investments, except for government bonds. The GSA remained in effect until its repeal in 1999, despite facing substantial opposition.
The Banking Act of 1935
The Banking Act of 1935 played a crucial role in setting up the Federal Deposit Insurance Corporation (FDIC) as a permanent entity. However, its impact went beyond that. This significant regulation also led to the creation of the Federal Open Market Committee (FOMC), which plays a central role in monetary policymaking. Additionally, it brought about changes in the structure and functioning of reserve bank board members and committees.
These effects have become deeply ingrained in our current money and financial policy, making it challenging to envision the system functioning without this act. The establishment of these boards removed money-making decisions from the realm of politics, ensuring that the nation's monetary policies are not controlled by whichever party holds power in the White House, be it Republicans, Democrats, Independents, or any other political group.
FDIC Act of 1950
The FDIC was established in 1933/1935, but it wasn't until 1950 that the deposit insurance we have today was fully developed, backed by the full faith and credit of the United States government through the Federal Deposit Insurance Act of 1950. In the beginning, deposits were insured differently, offering coverage up to $2,500 in 1934. Over time, the coverage amount has adjusted for inflation and now protects of up to $250,000.
The Savings and Loan Crisis and FIRREA (1989)
In the 1980s, the U.S. experienced a major savings and loan crisis, one of the largest financial scandals in its history, which contributed to high-interest rates during that period. People moved their money from savings and loan institutions to money market funds to avoid Regulation Q, a regulation capping interest earnings at those institutions. In response, savings and loans institutions took on riskier investments, backed by the Federal Savings and Loan Insurance Corporation (FDIC for savings and loans), leading to a financial crisis.
To tackle this crisis, the government introduced the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). It established the Resolution Trust Corporation to close insolvent thrifts and compensate depositors who lost money. FIRREA streamlined the savings and loan process and significantly influenced how we deposit money and earn interest today.
FDIC Backing Under FIRREA
As part of the FIRREA, savings and loans institutions were backed by the FDIC. This 1991 act strengthened the FDIC's authority by enabling them to guarantee deposits in such institutions. Additionally, the act allowed the FDIC to borrow from the Treasury in case of significant claims.
Dodd-Frank Act of 2010
The Great Recession, a well-known financial crisis, led to the implementation of numerous regulations and a demand for increased consumer power. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was a significant outcome, aiming to enhance financial stability, transparency, and accountability while protecting consumers from abusive financial practices. The establishment of the Consumer Financial Protection Bureau further strengthened consumer advocacy and watchdog efforts to prevent exploitation and ensure fair treatment.
Throughout the past century, several major regulations have profoundly influenced the United States' monetary, economic, and investment policies, shaping how money operates in the country. These regulations have played a crucial role in overseeing financial advisors, bankers, the Federal Reserve, and the Consumer Financial Protection Bureau, instilling confidence in consumers. While some regulations may not always work as intended, they can be adapted or revoked. Overall, the primary objective of these regulations is to foster economic stability and prioritize the interests of consumers in the financial landscape.