Policy & Regulation

Every piece of financial regulation is a letter addressed to the last crisis. Glass-Steagall was a reply to the 1929 crash. Bretton Woods was a reply to the competitive devaluations of the 1930s. The Volcker Shock was a reply to the stagflation that followed the Nixon Shock and the oil shocks of 1973. Each rule was the most intelligent response available at the moment it was drafted, and each one was eventually routed around by institutions that had more time to think about it than the people who wrote it.

The articles in this hub follow that loop. A crisis exposes a gap. Legislators fill the gap with a rule, usually under time pressure, usually with the previous disaster fresh enough that the political cost of acting is lower than the political cost of waiting. The rule works — for a while. Then capital finds the perimeter, the perimeter becomes the new battleground, and the rule either gets patched, replaced, or, as with Glass-Steagall in 1999, dismantled outright. The Savings & Loan crisis of the 1980s and 90s is the canonical case of deregulation meeting its consequences; the Plaza Accord of 1985 is the canonical case of five governments coordinating exchange rates by fiat and discovering that markets have longer memories than finance ministers.

What this topic covers

• The crisis that prompted the rule
• What the rule actually said, as distinct from what it was marketed to do
• Who the rule protected, who it constrained, and who it missed
• How capital routed around it — and what broke next

A timeline of the canonical policy moments

How the policy loop works

A useful way to read this hub is as a study in the half-life of regulation. The rules in the table were written in moments of high political consensus and (usually) high public anger. They were precise about what had just gone wrong and necessarily vague about what could go wrong next. Within a generation, the institutions the rules constrained had largely accepted them; the institutions the rules did not anticipate had grown up around them.

The Volcker Rule, written in 2010 to constrain proprietary trading at deposit-taking banks, was being routed around within a decade by family offices and non-bank financial intermediaries. Glass-Steagall, written in 1933 to keep commercial banking separate from securities underwriting, lasted 66 years; the Gramm-Leach-Bliley Act repealed it in 1999, and within nine years the financial system had learned what the original rule had been protecting against. The pattern is not unique to American finance. Britain's secondary-banking deregulation in 1971 produced the 1973 fringe-banking crisis. Iceland's bank privatisation in 2003 produced the 2008 collapse documented in the Iceland article.

The institutions that emerged from policy moments

Several of the institutions documented in the innovation hub appeared as direct policy responses. The Federal Reserve was created in 1913 after the Panic of 1907 made it impossible to keep relying on J. Pierpont Morgan's private rescue capacity. The Bank of England was created in 1694 to fund the Nine Years' War. The Buttonwood Agreement of 1792 codified broker-to-broker self-regulation in response to the speculative panic of that year. The relationship between crisis and rule is not metaphorical: it is institutional.

Modern parallels

The Bank Term Funding Program announced on the evening of 12 March 2023, after SVB and Signature failed, is the most recent letter to the most recent crisis. It will be routed around. The next policy article in this hub will document how.

Start here

• The Glass-Steagall Act — the wall between banking and speculation, built in 1933 and demolished in 1999
• Bretton Woods — the postwar monetary order and why it could not survive its own success
• The Volcker Shock — what it cost to break inflation when inflation was breaking the currency

For the political-economy view, follow with the Plaza Accord, which shows what coordinated currency policy looks like when the markets stop cooperating.