Class 11 - Econ 350 U.S. Financial Systems, Markets and...

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Econ 350 U.S. Financial Systems, Markets and Institutions Class 11 Econ 350 U.S. Financial Systems, Markets, and Institutions Class 11: A brief history of U.S. banking regulation Welcome back! This morning we shift gears somewhat. I don’t know about you, but I’ve had enough mathematics for awhile! So today we will look at the history of banking regulation. Before we look at the details, we should discuss some general patterns that we can observe throughout the history of banking regulation. First, as we have seen already, banking regulation is a very complex process. This is due to the fact that regulation is a political process, and American politics has a way of adding complexity as a means of compromise. We see this throughout the history of banking. The importance of federalism and our bipartisan political system to the history of banking cannot be overestimated. Second, regulation is a dynamic process. When banks see profit opportunities, they develop new financial products in response. As profits grow, political pressures increase to regulate the financial system. Eventually new regulations are passed. Then banks find loopholes, develop financial innovations to take advantage of those loopholes, and profits increase again. The process starts anew. Over time, these practices of financial engineering have become more important as sources of revenue for commercial banks. Course Objectives After today’s class, you should -- have a general knowledge of the history of U.S. banking regulation. -- understand how political and economic circumstances have helped to shape the structure of U.S. banking. -- appreciate the ways in which the Great Depression still affects us today. -- know the provisions of the Glass-Steagall Act and how it was gutted by the Gramm-Leach-Bliley Act. -- begin to comprehend how the deregulation of financial markets in the 1980s and 1990s contributed to the savings and loan crisis, and the recent corporate accounting scandals. A History of U.S. Banking Regulation The structure of the U.S. banking system has always been complex, and for most of our history easy entry regulations meant that the United States has had many types and a large number of banks. The many types of banks led to many types of regulatory agencies. The large number of banks helped to foster competition in the financial industry, but it also contributed to the instability of the financial system that we have seen throughout our history. This cycle of prosperity, instability and crisis has provided much of the impetus for changes in financial regulation throughout American history. We now turn to a brief timeline of U.S. banking regulation. 92
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Econ 350 U.S. Financial Systems, Markets and Institutions Class 11 A Timeline of U.S. Banking 1775 – 1781 -- The Continental Congress issues a paper currency, known as continentals, to finance the American Revolution. As more and more continentals are printed, hyperinflation results. This causes the currency to become worthless, or “not worth a
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Class 11 - Econ 350 U.S. Financial Systems, Markets and...

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