Elizabeth Warren explains why the US had no serious financial crises between the New Deal and the Reagan administration
Basically, the answer is that during the the 1930s a remarkably intelligent set of regulations was enacted to cover banking and the rest of the financial sector, and it worked. Then, starting in the 1980s, this valuable and highly successful framework of financial regulation was increasingly dismantled—not sensibly updated and adapted to new conditions, but heedlessly dismantled—in a process that combined free-market-fundamentalist ideological illusions with substantial amounts of irresponsibility, plutocratic muscle, political corruption, and simple greed. And it so happens that during the same period, starting in the 1980s, we have once again experienced recurrent financial crises (and massive bailouts), escalating most recently into the great financial crash of 2007-2009 from which we are still recovering. Coincidence? Unlikely.
In short, we have been engaged in a large-scale socio-economic experiment to test whether the unhampered operation of radically deregulated financial markets makes them more self-stabilizing, more efficient, and more beneficial for the economy and the larger society or, on the contrary, more volatile and unstable, more economically distorting, and more dangerous. Well?
This historical story should be one of those things that everyone knows about, to which everyone refers as a matter of course in debates about economic policy. But it isn't. In the video clip below, the always impressive Elizabeth Warren does an excellent job of boiling the story down to its essentials.
P.S. By the way, it's worth noting that even Adam Smith, the great theorist of the self-regulating market economy, recognized that financial markets posed special dangers and required special protections and precautions ... which he described in one passage as safety measures analogous to requiring firewalls in sensible housing codes.
Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of a whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed. (Wealth of Nations, Book II, ch. ii)