Some background: we used to have a workable system for avoiding financial crises, resting on a combination of government guarantees and regulation. On one side, bank deposits were insured, preventing a recurrence of the immense bank runs that were a central cause of the Great Depression. On the other side, banks were tightly regulated, so that they didn’t take advantage of government guarantees by running excessive risks.
From 1980 or so onward, however, that system gradually broke down, partly because of bank deregulation, but mainly because of the rise of “shadow banking”: institutions and practices — like financing long-term investments with overnight borrowing — that recreated the risks of old-fashioned banking but weren’t covered either by guarantees or by regulation. The result, by 2007, was a financial system as vulnerable to severe crisis as the system of 1930. And the crisis came.
And you should bear in mind that the biggest bailouts took place under a conservative Republican administration, which claimed to believe deeply in free markets.
Republican jingoism since Ronald Reagan. Tax holidays. Stripped government. Reduced regulation. Supply side and trickle down economics… Free markets. All this purchased with skyrocketing debt.
