Great Recession-Era Monetary Policy: What Caused It and How to Move Forward


The classic, often repetitive, argument from the left is that the repeal of Glass-Steagall and deregulation in the economy caused the 2008 economic recession and the housing market crash.

As convenient as it would be to say Glass-Steagall caused the recession, that the bailout and Barney-Frank fixed, it’s far from the truth and it actually worsens many things Democrats are afraid of, such as banks that are “too big to fail”.

Glass-Steagall Repeal

It’s incredibly easy for people like Governor Martin O’Malley (D-MD) to claim that killing this regulation at the end of the Clinton era through the Gramm-Leach-Bliley act made the banking sector go berserk because he sees two points and he connects them.

First, it would’ve had little effect on preventing most companies from going bankrupt. Lehman Brothers, Bear Stearns and Merrill Lynch were investment banks without a retail arm.
Bear Stearns failed due to poor investments, while commercial banks like Western Mutual went underwater because of bad loans.
Meanwhile, it would’ve done nothing to prevent the failures of insurance companies such as AIG or Ambac.

The faults of Fannie Mae and Freddy Mac don’t represent the free market at all, seeing as they were both government sponsored enterprises.
They’ve also done worse since being taken over fully by the government. Fannie Mae, for instance, has seen their annual revenue decline every year since 2010 (when the economy began to recover and improve) they went from $153.89 billion in 2010 to a meager $107.16 billion in 2016.

Next, the “big banks” like JP Morgan, Bank of America or Wells Fargo pretty much survived the financial apocalypse of 2008, and the regulation would’ve prevented them from swallowing up and taking care of struggling firms like Bear Sterns or Merrill Lynch, so there’s even an argument that the regulation would’ve made it worse.

The Bailout

This shouldn’t need much explaining, but why would a company be risk averse when the risk is reimbursed by tax payers?

First, let’s crush the myth that the TARP bailouts of November 2008 were a success. The US treasury admits it suffered a loss and only recovered 96.9% of the investment (when inflation is counted for) by November of 2014; when outstanding payments dropped to nearly zero that value lowered to 87.16% (Cumulative Inflation was 11.17% during that time).

The bottom line is that thanks to lobbying, these massive companies know they can use politicians from both the Republican and Democratic parties to take advantage of taxpayers, and they still do it today.

Annually, big banks receive roughly $83 billion in what is essentially a hidden subsidy through a liability discount, so even if the 2008 bailouts turned a microscopic profit, it wouldn’t matter because our “free market” government helps them every year at taxpayer expense, and we’ll never get that money back.

Thus, there’s no incentive for financial firms to alter their behavior.


Democrats had the chance in the early Obama years with full control of all chambers of our government to prove that regulation can fix the banking sector of the economy. They failed.

The 22,000 pages of regulations that comprise Dodd-Frank have caused banks to suffer and large firms to rejoice.

Small banks are typically defined as those between $100M and $1B in assets, while large banks are defined as those with over $15B in assets.
Since Dodd-Frank, the number of small banks has dropped by 14.1% and the number of big banks has increased by 6.3%.

Further, we’ve also seen the assets shrink tremendously as the share of small bank deposits as a percentage of all deposits decreased from 28.3% to 21.7% over the same period, of only four years.

They had the opportunity to base bank capital requirements on a risk-weighted system, and they instead created a bureaucratic mess of overlapping rules and ridiculous reporting requirements that small banks can’t keep up with.

The Housing Market

Was the housing market crash a failure of capitalism? Not exactly, since the markets were heavily influenced by government intervention.

The Community Reinvestment act of 1977, the Housing and Community Development Act of 1992, and the American Dream Down Payment Assistance Act of 2003 all had a prominent role in accelerating the housing bubble and irresponsibly extending capital to subprime borrowers.

The Housing and Community Developing Act, for instance, essentially required Fannie Mae and Freddie Mac to ensure that 30% of their loans purchased be related to affordable housing, thereby forcibly expanding credit to lower-income households, and since the HUD director oversaw the enforcement of this act, the HUD directors could increase this requirement. If this weren’t enough, the lowering of the Federal Funds rate from 6.5% to an artificially low 1% in the early Bush years worsened the housing market and played an enormous role in the 2008 crash.

The Solution?               

Glass-Steagall is an outdated regulation, there isn’t a good reason to bring it back; meanwhile, Dodd Frank and other major housing market regulations should be repealed to allow markets to equilibrate.

Further, the Riegle-Neal act of 1994 which modified the McFadden act should be altered, because, much like the insurance industry, it is vital to make it easier for banks to offer services across state lines.

It is also important to end corporate welfare for big banks and make it clear that another $700 billion bailout will not happen.

Next, I do support the idea of the reserve requirements being progressive insofar as it increases from 0% to 3% to 10% because it keeps larger banks stable while allowing smaller ones to grow, but I would like to see capital requirements be risk-weighted so that repurchased mortgages and federal bonds aren’t seen as essentially the same in the eyes of the legally blind federal government.

Overall, it seems evident that most of the criticism of the free market being responsible for the 2008 financial collapse in the United States is ill founded, and Democrats specifically are arguing for policies that lead to the very things they supposedly hate: concentration of financial assets in a few powerful institutions, federal support of for-profit banks at taxpayer expense and irresponsible lending (even though the irresponsible lending was on behalf of GSEs).

At the end of the day, it was regulations and growth of the housing bubble as a result of the federal government, not the private sector that caused the recession, whereas the repeal of Glass-Steagall was irrelevant.

As for Republicans, they too have strong ties with Wall Street and a whopping 46% of GOP representatives voted for the Bailout, and there has been little to no conversation of monetary reform on the right, so it’s tough to have hope on this issue.

The following two tabs change content below.

Jake Dorsch

Jake Dorsch is a libertarian activist, bank teller, investor and aspiring future economist from Green Bay, Wisconsin that is pursuing a bachelor’s degree in both political science and quantitative economics at Drake University. He is currently on track to graduate a year early and will likely continue to obtain a master’s degree in econometrics.