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Wall Street dodges a bullet, how about the next one?

By David Dapice - posted Friday, 19 September 2008


But over time, there’s a tendency for regulated firms to lobby so as to weaken the regulators. Fannie and Freddie did this, helping to ensure they could grow very large with little capital or effective oversight, even while many experts warned of the risks of their expansion. Investment banks persuaded Congress in 1998 to repeal Glass-Steagall, the Depression-era law that separated commercial and investment banking.

So, it’s quite possible that the steps taken to prevent another crisis will weaken. The US will have fewer banks with more access to Federal Reserve borrowing. More will become “too big to fail”. In that case, the danger of moral hazard and large-scale crises could be even greater. Will taxpayers decide that the next crisis is worth managing or just too expensive?

Third, there’s the question of who else will line up for loans. If financial firms can be bailed out, why not auto companies? They’ve lobbied against higher fuel efficiency standards for decades and now want $50 billion in federal loans to build fuel-efficient factories - though they already build more efficient vehicles overseas. Farmers and processors already get ethanol and crop subsidies. Shipping, renewable energy and utility companies will no doubt ask for subsidies and loans, too. But with a large federal deficit and looming health and pension burdens, it’s not at all clear that even existing commitments can be met.

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Then there are millions of homeowners facing home foreclosure. They will ask why big firms can get help while they lose their homes. By attempting to offset the impact of creating hundreds of billions of dollars of toxic debt, the US has opened a Pandora’s box, and can expect many troubles to emerge before finding hope at the bottom.

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Reprinted with permission from YaleGlobal Online - www.yaleglobal.yale.edu - (c) 2008 Yale Center for the Study of Globalization.



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About the Author

David Dapice is associate professor of economics at Tufts University and the economist of the Vietnam Program at Harvard University's Kennedy School of Government.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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