Analysis and Comparison of the
Regulatory Responses to the Great
Depression and Financial Crisis of
2007-2008
By Devon Beaty
Overview
• Hypothesis
• The Great Depression
• Financial Crisis of 2007
Hypothesis
• Inequality of Income was a major factor in
both panics
• Deregulation of New Deal Legislation
caused the recent recession to be more
severe than it had to be
The Great Depression
Historical Background
• Decline in Industrial
Production
• Decline in Agricultural
Prices
• European Financial
Collapse
• Hoover Orthodox
Economic policy
Andrew Mellon: Secretary of the
Treasury (1921-1932)
Theory: Spending
• The General Theory of
Employment, Interest and
Money (1936)
• Circular flow of money
• Expand money supply
• Liquidity trap
• Government replaces
consumer spending
• “Priming the Pump”
John Maynard Keynes
Theory: Monetary
• A Monetary History of the
United States (1963)
• Federal Reserve
• Tightening Monetary
Policy
• Raising Interest Rates
• Failure to stabilize
banking system
Milton Friedman
Regulation and Policy
• The Glass-Steagall Act of 1932 and 1933
• Securities and Exchange Commission
• National Housing Act
• Federal National Mortgage Association
Hypothesis 1
• Income inequality did play a partial role in
the Great Depression
• Peter Temin
• Paul Krugman’s Great Compression
Financial Crisis of 2007
Historical Background
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Fannie Mae and Freddie Mac
Securitization
Community Reinvestment Act of 1977
Alternative Mortgage Transaction Parity
Act of 1982
• Gramm-Leach-Bailey Act
Collateralized Debt Obligations
Anna Katherine Hart-Barnett CDO Meltdown Harvard
Anna Katherine Hart-Barnett CDO Meltdown Harvard
Derivatives
• OTC derivatives
• Commodities Futures
Trading Commission
• Commodities Future
Modernization Act of 2000
• Credit Default Swaps
Brooksley Born: Chairperson of the
CFTC (1996-1999)
Credit Default Swap
Financial Collapse
Regulatory Agencies
• Gramm-Leach-Bailey Act
• Federal Reserve keeps
rates low
• CFTC sterilized
• SEC allows increased
leverage
Alan Greenspan: Chairman of
Federal Reserve (1987-2006)
Housing Bubble
• Low Interest rates made ARMs, Variablerate and Sub-primes attractive
• 2004 home ownership rate peaked an all
time high of 70%
• Individuals began using homes as an
investment
• Federal Reserve Interest rate increase
offset by countries like Germany, Japan
and China
Housing Bubble cont.
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Foreign money helped excess
NINJA loans
Financial Institutions increase leverage
Surplus in houses; decline in prices
Sup-prime payments too high
Equity in houses decreases
Foreclosures further lowered prices
“Too Big to Fail”
• Sub prime industry collapse
• Financial Institutions began to collapse
also
• Bear Stearns acquired by J.P. Morgan
• Investment banks reported large losses
• Banks stop lending to each other
• Leman Brothers collapse
• Merrill Lynch sold to Bank of America
“Too Big to Fail” cont.
• Certain institutions’ failure would
systematic collapse
• AIG owed billions through CDS defaults
• U.S lent 85 billion to AIG alone
• Congress authorized 700 billion in bank
bailouts
Corporate Compensation
• Simon Johnson argues that increase in
corporate pay compensation drove
financiers to increase profits through risk
• Lawrence H. White argues that it was
govt. through low interest rates and
encouraging unqualified barrowers for
loans
The Banking Crisis pg. 33 Simon Johnson
Financial Regulation
Troubled Asset Relief Program
• Treasury Dept. can buy or insure 700
billion in troubled assets
• Targeted assets were CDOs
• Bush administration began it on October 3,
2008
• Initially estimated at 365 billion but only
cost billion
Dodd–Frank Wall Street Reform
and Consumer Protection Act
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Restructure of regulatory agencies
Financial Stability Oversight Council
Volcker rule
Certain non-bank financial institutions
supervised by the Federal Reserve
• Office of Thrift Supervision eliminated
Hypothesis 2
• Deregulation played a major role in the
Financial crisis
• Banks maximized profits by using risky
assets.
• Regulatory oversight could have stopped
the financial meltdown.
Questions