In 1933, President Franklin Roosevelt signed the Glass-Steagall Act. By then, the country was mired in the depths of the Great Depression, and nearly 5,000 banks had failed. Businesses and people lost money. People lost jobs. The country was in crisis. Glass-Steagall was designed to prevent another crash in the future. Among other things, it barred commercial banks from getting into the investment business. It raised barriers between commercial banks, securities firms and insurance companies.
Nearly 70 years later, the Depression was history, and there was a push for deregulation to repeal or roll back Glass-Steagall. The result was the Gramm-Leach-Bliley Act of 1999, which took down that wall between the banks that made routine loans and the ones that did risky investments.
Experts are still arguing about what caused the recession that started in 2008, but many point to Gramm-Leach-Bliley as a major culprit.
The removal of the walls between commercial banks and investment banks led to mergers and promoted risky lending. The Commodity Futures Modernization Act, passed in 2000, made things worse by letting the popular new financial derivatives and swaps go unregulated, further promoting risky mortgages.
Many banks ventured into areas they knew little about. They made bad loans and took gambles. Subprime mortgages were chopped up into pieces and bundled into bad investments. Sometimes, it was hard to tell who owned what.
What started as a subprime mortgage crisis in 2007 quickly spread through most sectors of the economy, causing what is widely regarded as the worst financial crisis in the U.S. since the Great Depression.
Keep reading for lots more information on economic concepts.
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