Personal Finance Advice

Starting in the 1970’s, the banking system has undergone a long cycle of deregulation.  The culmination of all this was the repeal of the Glass-Steagall Act in 1999 which has since muddied the distinctions between banks, securities firms and the insurance industry when they began a period of consolidation.

The arguments for deregulation was to foster a climate of competition, innovation and lower prices by lessening government oversight and allowing  market forces to dictate the flow of credit.  Since then financial sector has experienced a rapid expansion by offering many new products and services.

After this current financial crisis is over, I think we can expect things turn back the other way.  While the collapse of the housing bubble was the main cause of our current economic troubles, no one can deny that the financial sector has it’s fair share of the blame for all this.  Lax lending standards and excessive risk taking through the explosive growth of securitization and derivatives has created a highly leveraged financial machine that is at it’s breaking point.

Unfortunately because the financial system is so intertwined now, market forces can’t be allowed to reach their ultimate conclusion, the collapse of a large number of financial institutions, no matter how much they deserve to go out of business.  The Federal Reserve has had to step in and use powers it hasn’t needed since the Great Depression in order to keep the banking system from collapsing.

One thing is for certain though, the larger the final cost to taxpayers, the more lawmakers will call for an increase of regulatory oversight of the financial services industry and that might not necessarily be a bad thing.