In September 2008, the United States faced what President Barack Obama called the "most profound economic emergency since the Great Depression." A mortgage crisis begat a credit crisis, shaking the entire financial system and sending the U.S. economy into what has been called the Great Recession.
This crisis was caused in large part by the opaque and unregulated over-the-counter (OTC) derivatives, or "swaps," market, which was then estimated to have a value of almost $600 trillion, or 10 times the world's gross domestic product. Approximately one-tenth of the unregulated OTC market was made up of the now-infamous credit-default swaps, a product that Wall Street sold to "insure" sub-prime mortgage investments but which lacked regulation and, therefore, the capital required to support these "guarantees" When sub-prime investments failed, the "insurance" payments were triggered. Only the multitrillion-dollar U.S. taxpayer interventions to save Wall Street prevented a worldwide depression.
This crisis was the direct result of the deliberate dismantling of regulatory safeguards. After the collapse of the equity markets and then the banking system between 1929 and 1933, the Roosevelt administration drove the passage of the Securities Acts of 1933 and 1934 to regulate securities, and the Commodity Exchange Act of 1936 to regulate futures transactions. These landmark legislative efforts established eight classic regulatory norms to prevent systemic financial collapse in financial markets, including transparency of prices, record-keeping, capital adequacy, full disclosure, anti-fraud and anti-manipulation prohibitions, regulation of intermediaries, private enforcement through litigation, and the federally supervised self-regulation of financial exchanges.
These eight guidelines still govern ordinary stock markets today, and K is noteworthy that malpractices in conventional securities played no role in the 2008 systemic worldwide collapse. These norms had …