After the Fall

Since the rumblings of the economic crisis began in 2007, Americans have suffered four years of fear, recession, and stagnation. The culprit is not free markets, but Washington policy. The problem is politicians’ and regulators’ treatment of the nation’s “too big to fail” financial industry—not just in recent years, but over nearly three decades. America can’t recover until its citizens understand these policy failures—and put a halt to them.

As financial markets melted down in 2008, President George W. Bush stepped in to make it clear that taxpayers stood behind large financial firms. Months later, President Barack Obama pumped nearly $800 billion in “stimulus” into the economy. A year after that, Federal Reserve Chairman Ben Bernanke attempted another $600 billion rescue. Yet the economy remains stalled.

Americans can’t pull themselves up by their bootstraps while their financial industry is pushing them down. Wall Street, which controls the nation’s investment capital, is not operating by free-market rules, but under permanent government protection. The financial industry is competing with the rest of us, rather than supporting us. No wonder we’re failing, when so much of our economy is not based in free markets.

How has Wall Street escaped free-market discipline? It didn’t began in 2008. The problem began nearly thirty years ago, with the nation’s first modern bank bailout. In the early eighties, modern finance began to escape the rules that governed it, including the most important regulation of all, that of the marketplace.

The financial industry, because it had escaped market constraints, eventually posed an untenable risk to the economy—a risk that culminated in the trillions of dollars’ worth of government bailouts that Washington scrambled starting in late 2008.

Today, government policy toward the financial industry poses an even bigger risk. As the American economy tries to recover, finance, thanks to its government support, is holding other industries back. Large banks, subsidized by taxpayers, can offer young college graduates salaries and bonuses that tech firms and other industries can’t offer, hurting our ability to compete.

Fixing this problem isn’t difficult. A history of the financial industry from the Great Depression to the present makes clear what Washington must do. As Gelinas explains in this richly detailed book, adequate regulation of financial firms and markets—the kind the government achieved from the 1930s through the 1980s—is a prerequisite for free-market capitalism, not a barrier to it.