What is Going on with Our Economy?
Orange County Lawyer, Vol. 54, No. 1, p. 10, January 2012
4 Pages Posted: 4 Jan 2012
Date Written: January 4, 2012
The financial crisis was caused by two factors. First was the abnormally easy money policy followed by the Federal Reserve for many years, keeping down interest rates, and creating a bubble in real estate. The second was the influence of the federal government, under both parties, and through both Congress and the President, to increase home ownership whether or not individuals were financially able to carry the mortgage. The first factor fed the second as higher real estate prices gave the impression that refinancing would be able to pay off mortgages even if a borrower's income could not. Solutions to the problem can be of two kinds. First, complete regulation: which is close to what Dodd-Frank has created. Unprecedented oversight of financial institutions, including many not involved in the crisis at all, has now been established. An alternative approach was bypassed: that would have been to undo government involvement in the housing markets, while restoring the Glass-Steagall protections against federally insured commercial banks being affiliated with investment banks. The Gramm-Leach-Bliley bill that allowed banks to grow so large was a mistake. Repealing it would constitute an alternative to massive increase in regulatory oversight, and we would see financial institutions of a size and nature that they were not "too big to fail."
Keywords: economy, financial crisis, banking
JEL Classification: E50
Suggested Citation: Suggested Citation