The Effects of Financial Deregulation

Updated February 21, 2017

Deregulation of the financial industry began in the 1980s with the slow repealing of the Glass-Steagall Act of 1933, which was originally created in response to the Great Depression to regulate the financial sectors of business. Financial deregulation has proved to be a catastrophe in the U.S., with mortgage lenders growing into massive corporations and conducting predatory lending practices that ultimately led to a huge blow to (and, some would say, near-collapse of) the country's entire financial system.

The Assumption of Regulation

When Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980 in an effort to slow the effects of a nationwide recession, it was assumed that the financial markets would simply regulate themselves. This could not have been further from the truth, as banks and other financial institutions used these relaxed regulations to develop landing practices using variable interest rates that ultimately contributed to the mortgage crisis of 2007 when interest rates became so volatile that consumers couldn't withstand the increased loan payments.

Increase in Financial Business Sizes

Deregulation of the financial markets allowed banks and other financial institutions to acquire rival financial institutions. Consumers recognise this phenomenon through a constant series of name-changing that banks have gone through since 1980. This trend led to large financial institutions, such as AIG, gaining hands in almost all sectors of the financial world, from mortgages to business loans, stocks and managed-401k retirement funds for businesses. These organisations, many of which received federal bailout money, were ruled "too big to fail" due in part to deregulation of financial rules that allowed them to become so infused in every aspect of the market.

Increased Market Volatility

Due to fewer financial institutions in the market through buy-outs and acquisitions, volatility occurs more frequently, because there are not enough businesses to absorb these normal fluctuations. This move to monopoly flies in the face of free-market principles that enable financial sectors to weather fluctuations in consumer spending and bad business decisions. Variety means that one business cannot scuttle the entire field. This is particularly true of the mortgage crisis in the United States, where behemoth-sized mortgage lenders like Fannie Mae went bankrupt because of predatory lending practices that forced consumers into situations where foreclosure was all but certain. When Fannie Mae stopped receiving payments on loans in record numbers, the lack of cash triggered a domino effect through the rest of the business' investments--causing multiple financial sectors to suffer.

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About the Author

Jonathan Lister has been a writer and content marketer since 2003. His latest book publication, "Bullet, a Demos City Novel" is forthcoming from J Taylor Publishing in June 2014. He holds a Bachelor of Arts in English from Shippensburg University and a Master of Fine Arts in writing and poetics from Naropa University.