Almost a decade has passed since international markets experienced the most severe financial catastrophe since the Great Crash of 1929. The collapse of the U.S. residential mortgage market in 2008 ignited a chain reaction that froze global markets and culminated in a historic U.S. tax-payer funded bailout of the financial industry. The Government Accountability Office estimates that the 2008 financial collapse and the economic devastation it caused will cost the U.S. $22 trillion. In response, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) to address some of the egregious abuses of Wall Street and to protect the financial stability of the United States. While it’s still early, there has been no recurrence of the large-scale, national financial distress since the enactment of Dodd-Frank.
In his article, Financial Reform Is Working, But Deregulation That Incentivizes One-Way Bets Is Sowing the Seeds of Another Catastrophic Financial Crash, Dennis Kelleher argues that the Trump Administration’s impulse for financial deregulation incentivizes the reoccurrence of the most dangerous, highest risk financial activities and “too-big-to-fail” financial entities that risk undermining the financial stability of the United States. In Part I, Kelleher discusses the new administration’s deregulatory actions to gut the Financial Stability Oversight Council (“FSOC”), which was created by the Dodd-Frank Act to regulated the nonbank financial sector and to eliminated a two-tiered regulatory system that encouraged regulatory arbitrage. Kelleher argues that undermining FSOC will ultimately exacerbate the problem of moral hazard as financial entities continue to engage in the most high-risk financial activities, while expecting to be bailed out by the U.S. taxpayer in the event of failure.
In Part II, Kelleher shows that economic growth and financial regulation are not incompatible goals, but actually necessary compliments. Furthermore, he argues that financial regulation both insulates the economy from financial crises and allows it to grow durably at sustainable rates. In Part III, Kelleher encourages policymakers in Washington to withstand the pressure to deregulate the financial markets; thus, deregulation of “too-big-to-fail” entities is short-sighted and dangerous as gigantic financial institutions begin to externalize their costs again, shifting the burden of their risk-taking to the American taxpayers. Moreover, Kelleher’s article prompts relevant stakeholders to assume the challenge to preserve the stability of our financial markets by resisting the administration’s presumption for pursuing a strategy of deregulation.