Helping Businesses Avoid the Dreaded Recessions

This week’s readings highlight the fragility of America’s economic stability in the years from the Nation’s founding until the Great Crash of 1929.  Almost cyclically early Americans suffered through economic recessions once every five to ten years. The journal articles in particular reinforce this cycle –featuring four different economic panics in the course of forty years from 1854 to 1893. Though the severity of these depressions varied, their consistency showed a need for change.

Willingness to push for economic reform via regulation did not take hold until after the severe economic slump of the Great Depression. Galbraith’s The Great Crash: 1929 details the economic history of the great crash to show how and why the crash occurred the way it did. Because of its severity, the international ramifications, and the mood of political reform during the 1930’s the stock market crash of 1929 led to major regulatory changes for business and Wall Street. Including, “the Securities Act of 1933, and… the Securities Exchange Act of 1934” which each “sought to prohibit the more spectacular extravagances of 1928 and 1929.” (Galbraith, pp. 171)

Following the regulation put in place in the 1930’s there was not another severe economic depression for fifty years. It seemed as if America had finally beaten its boom and bust cycle. But then in the 1980’s the government began to pull away at the fabric of regulation. Politicians and business leaders had long forgotten the devastating nature of busts and decreased regulation in order to obtain the kinds of speculative lavishness of the 1920’s.  The result was the SNL Crisis, followed by recessions of the early 1990’s, the tech bubble, Enron, and finally the current economic recession.

Though regulation can be costly, time consuming, and can limit the rapid expansion of speculation they also help to prevent serious panics. Because of the safety net provided by regulation it would be in business’ long term interest to support regulation. The frequent economic slumps since the relaxation in regulation should prove to business leaders that regulation is actually in their long term interest.  Rather than resist reform, business leaders should call for regulation to fix the current broken system. “Long run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present. So inaction will be advocated in the present even though it means deep trouble in the future… It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.” (Galbraith pp. 199)Business leaders must move against the status quo and unfounded fears that all regulation will hurt them. Though regulation may limit the speed and extreme nature of booms ultimately they are in businesses’ best interest because they also help to prevent and lessen busts.

Here is a great interview with Elizabeth Warren, chair of the Congressional Oversight Panel, which explains a lot about the recession, the bail out, and America's boom and bust cycle.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Elizabeth Warren Pt. 2
www.thedailyshow.com
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Comments

[Dianne Foster]

As Galbraith says, "Who will regulate the regulators?" Some measures have been more effective than others at curbing excesses in banking behavior, for example, the creation of the FDIC has proved useful for calming panics, but does it encourage recklessness on the part of bankers?

Unfortunately, some politicians think the solution to everything is no regulation while others think regulation, regulation, regulation.

Even with laws on the books, often the problem is money. The executive branch cannot orchestrate regulatory work if the legislative (which holds the purse strings) does not approprate the funds. The failures of the FDA in the recent past were perhaps caused by lack of funding...which is a two-edged sword. If Congress does not appropriate funds, then they are not at risk of being spent whether or not the chief executive wants to spend them.

There are many laws on the books completely ignored by both the executive and legistlative branches of the federal government.