The NY Times published a good article today outlining the presidential hopeful’s views on financial regulation (click this link to view). By the sounds of it we can expect greater governmental oversight over the financial markets in the coming years.
It is no surprise that a reaction for greater financial regulation has resulted following the third financial collapse in as many decades. In the 1980s the savings and loan crisis forced 747 financial institutions to fail. In the 1990s it was the dot-com bubble that burst wiping out approximately $5,000,000,000,000 ($5 trillion) in market capitalization in only 2 years. Currently, we find ourselves in the largest credit & housing expansion and downturn in US history (the extent of the housing cycle is creatively displayed in this video by John Burns).
In each instance the pattern of activity tends to be similar. At first a small group of people begin to acquire an asset (i.e. stock, house, mortgage-security) and that asset class performs extremely well over a short period of time. Word spreads that this particular asset class is a great investment and more and more people get involved. So on and so forth until rationality has left the marketplace and folks are buying up the asset left and right without any regard to the actual fundamentals behind the investment. Along the way enterprising and dishonest salesman find ways to “help” less educated and less sophisticated buyers get into the game. Around this time is typically when the music stops and those left holding the asset are the ones who lose huge.
To a degree this explains how each of the aforementioned economic bubbles have occurred. Many people have blamed the period of deregulation in the financial markets from 1970-2000 for allowing so many people to get into financial trouble. If this is indeed the cause then it would only make sense to have the government tighten down on the financial markets. It is no surprise then that the two presidential hopefuls are proponents of this approach as is Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson.
Although I do agree with these people that some additional governmental regulation would be helpful (so long as it is actually enforced) I think the greater preventive measure lies in our education system. For me this period in our history is only partially about lack of government oversight and is more about lack of fiscal literacy among consumers.
The Economist wrote an excellent article about fiscal literacy which I posted on my blog back in April (view it by clicking this link). My hope is that the presidential nominees will spend time this fall talking about ways to improve our national education system so that in the future consumers will be able to ask informed questions, properly analyze their options, and make quality decisions regarding their financial matters. Otherwise we may find ourselves in this position again next decade.