The recent history of the
financial crisis reveals that an unchecked zeal to deregulate combined with too-good-to-be-true financial stratagems have led to not only Wall Street debacle but also the worst global stock market turmoil.
There actually had been plenty of experience and lessons with dumb ideas and reckless choices that financial wizards didn’t learned. Looking back, we revisit the obvious lessons during the past three decades.
1982: Savings and loan deregulation, rationalized by Milton Friedman-influenced Chicago School free-market theory, allows thrifts to gamble on more speculative lending.
1985: Drexel Burnham Lambert's Michael Milken promotes "junk bonds" as a new way to finance business, promising that phenomenal interest rates will offset greater risks.
1986: Savings & Loan crisis intensifies, ultimately leading hundreds of thrifts to fail, largely because of bad real estate deals.
1989: Junk-bond market collapses, worsening the Savings & Loan debacle; Drexel eventually implodes, and Milken later pleads guilty to fraud.
1991: First Bush Administration wants to repeal the Glass-Steagall Act separating commercial from investment banking; the restriction is eliminated during the Clinton Administration.
1994: With a pair of Nobel prizewinners (Stanford's Myron Scholes and Harvard's Robert C. Merton) on its board, the hedge fund Long-Term Capital Management attracts attention for piling up huge gains while claiming to have discovered market models that drastically limit risk.
1998: Long-Term Capital's models failure during Russian debt crisis, requiring a $3.6 billion federally engineered bailout and leading to the firm’s closure.
1999: A digital "New Economy" inspires an investor craze for technology companies with snazzy ideas but little or no profits.
2000: As hundreds of Internet startups fail, the dot-com bubble bursts; the next year, Enron, the energy-trading juggernaut, is felled by delusional deal making and accounting fraud.
2004: Federal Reserve Chairman Alan Greenspan, who earlier opposed tougher regulation of the financial derivatives that contributed to Long-Term Capital's demise, praises adjustable-rate mortgages and refinancing for ordinary homeowners.
2006: Lenders push adjustable-rate and subprime mortgages, while Wall Street and hedge funds create a housing bubble by bundling millions of risky loans and reselling them to investors.
2007: Bear Stearns discloses that two of its hedge funds have lost most of their value, leading to the investment bank's fire-sale purchase by JPMorgan Chase in 2008.
2008: After suffering huge subprime losses, Lehman Brothers heads toward liquidation, and a panicked Merrill Lynch sells itself to Bank of America; giant insurer AIG and mortgage financiers Fannie Mae and Freddie Mac are taken control of by the U.S. government.