How did deregulation contribute to the financial crisis of 2008?
Answer (1)
Deregulation means removing or reducing rules and restrictions in an industry. While deregulation can make it easier for businesses to grow and innovate, it can also lead to abuse if companies act without responsibility. This is exactly what happened in the years before the 2008 financial crisis.In the U.S., important financial rules like the Glass-Steagall Act were repealed in the 1990s. This allowed commercial banks (that hold people’s savings) and investment banks (that deal with stocks and risky investments) to merge or do each other’s jobs. It created more chances for banks to make profit—but also more chances to take big risks with people's money.Because of deregulation, banks could approve loans to people who didn’t really qualify. They created complicated investment products like CDOs and credit default swaps that were poorly understood, even by the experts. Worse, these products were sold around the world, spreading the risk.Credit rating agencies, which were supposed to warn investors about risky investments, were not regulated enough either. They gave high ratings to dangerous products just to please the banks who paid them. Meanwhile, government regulators didn’t act fast enough to stop the system from overheating.When the bubble finally burst, the damage was already done. The financial crisis spread globally, and even countries in Asia like Japan, China, and the Philippines felt the effects through trade, job losses, and falling investment.
