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“Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the banking company which attempts it.”
Adam Smith, The Wealth of Nations
“I think we will look back in ten years’ time and say we should not have done this, but we did because we forgot the lessons of the past.”
U.S. Senator Byron L. Dorgan in 1999 on the repeal of the Glass-Steagall Act.
Four years ago this week, the financial crisis took the world’s economies to the brink of collapse. September 15, 2008, the day Lehman Brothers failed and sent global financial markets into cardiac arrest, was my wedding anniversary. My wife and I were celebrating at the time on the Mediterranean coast of Turkey – a memorable trip, to be sure. Reflecting back on that moment now, I’m struck by how little distance our nation has traveled since.
Though we survived the tidal shock waves in 2008, our capital markets remain in a precarious condition. Public trust, severely undermined by revelations of reckless behavior, lax oversight, and the ensuing instability of our major financial institutions, has yet to be restored. This state of affairs is not good for investors or the country as a whole.
The causes of the financial crisis, both here and abroad, will remain a matter of debate, with the conclusions drawn often depending on one’s politics. But there can be no doubt that banks, insurance companies, and other major financial players became shockingly over-leveraged in the years leading up to 2008. This dramatic increase in leverage (and the inevitable corresponding reduction in the systemic “safety net”) was intentionally obscured, invisible to both regulators and the public. In some cases, it was invisible even to the financial institutions themselves.
The outrageous expansion of financial-sector leverage took place concurrent with efforts on Capitol Hill to weaken and dismantle regulations that had protected the industry from exactly this sort of crisis for more than 60 years. It was a bold policy experiment – to allow a critical industry, one with tentacles in every facet of our economy, to essentially regulate itself – and it failed in spectacular and costly fashion.
