Special Report on Regulatory Reform Page: 2
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I. Executive Summary
1. Lessons from the Past
Financial crises are not new. As early as 1792, during the presidency of George Washington, the
nation suffered a severe panic that froze credit and nearly brought the young economy to its knees.
Over the next 140 years, financial crises struck on a regular basis-in 1797, 1819, 1837, 1857,
1873, 1893-96, 1907, and 1929-33-roughly every fifteen to twenty years.
But as the United States emerged from the Great Depression, something remarkable happened: the
crises stopped. New financial regulation-including federal deposit insurance, securities regulation,
and banking supervision-effectively protected the system from devastating outbreaks. Economic
growth returned, but recurrent financial crises did not. In time, a financial crisis was seen as a ghost
of the past.
After fifty years without a financial crisis-the longest such stretch in the nation's history-
financial firms and policy makers began to see regulation as a barrier to efficient functioning of the
capital markets rather than a necessary precondition for success.
This change in attitude had unfortunate consequences. As financial markets grew and globalized,
often with breathtaking speed, the U.S. regulatory system could have benefited from smart changes.
But deregulation and the growth of unregulated, parallel shadow markets were accompanied by the
nearly unrestricted marketing of increasingly complex consumer financial products that multiplied
risk at every stratum of the economy, from the family level to the global level. The result proved
disastrous. The first warning followed deregulation of the thrifts, when the country suffered the
savings and loan crisis in the 1980s. A second warning came in 1998 when a crisis was only
narrowly averted following the failure of a large unregulated hedge fund. The near financial panic of
2002, brought on by corporate accounting and governance failures, sounded a third warning.
The United States now faces its worst financial crisis since the Great Depression. It is critical that
the lessons of that crisis be studied to restore a proper balance between free markets and the
regulatory framework necessary to ensure the operation of those markets to protect the economy,
honest market participants, and the public.
2. Shortcomings of the Present
The current crisis should come as no surprise. The present regulatory system has failed to
effectively manage risk, require sufficient transparency, and ensure fair dealings.
Financial markets are inherently volatile and prone to extremes. The government has a critical role
to play in helping to manage both public and private risk. Without clear and effective rules in place,
productive financial activity can degenerate into unproductive gambling, while sophisticated
financial transactions, as well as more ordinary consumer credit transactions, can give way to
swindles and fraud.
A well-regulated financial system serves a key public purpose: if it has the power and if its leaders
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United States. Congressional Oversight Panel. Special Report on Regulatory Reform, report, January 2009; United States. (https://digital.library.unt.edu/ark:/67531/metadc1438930/m1/3/: accessed April 23, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.