The Cyclical Patterns of Financial Regulation

The Cyclical Patterns of Financial Regulation

The finance industry is the most heavily regulated sector in the United States and the world. Financial institutions often hold the financial well being of households in their hands. Because of this, many different types of regulations have enacted in order to protect consumers from the dangers of a financial crisis. There have been two defining moments in the history of financial regulation. The first is the stock market crash of 1929 and the Great Depression that followed. During his first 100 days in office, President Roosevelt enacted the New Deal, which applied regulations and relief programs across the country. The most important regulations applied to the financial sector, and were intended to protect the general public against risk. The next sweeping set of regulations came about in 2010, after the 2008 financial crisis. The Dodd-Frank Act of 2010 made drastic changes to current financial regulations. Tracing the history of financial regulation, it has followed a cyclical pattern. The industry was regulated after the crash of 1929, deregulated in the 1980s and 1990s during the technology boom, and reregulated once again in 2010 in response to the crisis.

World War I was extremely profitable for manufacturers, who after the war had billions of dollars to invest in the stock market. This drove prices up and lead to speculative buying. The market was so bullish that a stock purchased in the morning could be sold in the afternoon for a considerable profit. President Harding paid off the national debt, taking U.S. securities out of the market, which lead to increased investment in the stocks. Many working class Americans, with little experience, withdrew their savings from banks and invested in the rapidly growing stock market. Traders began to purchase stocks on margin. Brokers encouraged their clients to buy shares by committing ten to fifty percent of the purchase price, using bank loans for the rest, collateralized by the stocks themselves. Many traders did this, as it was feasible to by $1,000 worth of stock for $100 that could soon be worth $2,000 in a few days. Margin buying can work well, but only if the market continues to rise consistently. The bubble would not stay intact for long.

From 1918 until the last quarter of 1929, the stock market rose consistently. Corporate profits increased throughout the decade, but only modestly. The increase in profits was not enough to justify the enormous increase in the value of stocks. The market began to decline on October 23, 1929, when the New York Times index dropped from 415 to 384. The 7.5 percentage drop was a huge one-day loss. The following day, 13 million shares were traded in a panic and the index dropped a further 12 points. The market fell further on Black Monday and Black Tuesday, but did not hit its bottom of 58 until June of 1932.

The collapse of the stock market resulted