 Hi, this is Gerald Friedman, Department of Economics, University of Massachusetts, and we're here today to talk about deregulation and even more, we're here to talk about memory and forgetting. Let's start with the great crash, Black Friday in 1929, when the Dow Jones lost 30% of its value en route to losing something like 96% of its value over the course of the Great Depression from 1929 to 1933. The Great Crash is also the title of a book by John Kenneth Galbraith, a Harvard economist. Galbraith was a graduate student in the 30s and an active in liberal democratic politics and government from the 1930s through his death just a few years ago, 10 years ago, something like 2002. Somebody can Google it and let me know exactly when he died. He was quite an old man. He was very tall. I once got on the elevator with him and I looked up at him and said, oh my God, you really are tall. I mean, what a stupid thing to say. But that's what I said. And he looked down at me and he quoted Charles de Gaulle, the better to stomp on the little people. I was so intimidated, at least he didn't say it in French. Anyway, Galbraith wrote a book of the Great Crash which became kind of the blueprint for how New Deal politicians and liberal democrats interpreted the events of the 1920s leading up to the Great Depression. In this view, financial markets were subject to, first, a euphoria, belief that prices are just going to keep going up, everything will be wonderful, everybody's going to get rich, richer and richest. And forgetting, forgetfulness, they'd all forgotten that we had had crashes in 1919-1920. We had a crash in 1907. We had a giant crash in 1893. And by 1929, everybody had forgotten those things. They had forgotten that whatever goes up is subject to going down. And the higher it goes up, the harder it comes down. They had forgotten about the tulips. In the 1670s, there was a bubble in tulips in Holland. Tulip prices rose to the equivalent of $250,000 a bulb that didn't stay there. They came down and people who had paid $250,000, ouch, but remember something else about it. The people who had paid $150,000 for a tulip and sold those bulbs for $200,000 or $250,000 made a lot of money. And that's what everybody was thinking in 1929. Yeah, they'd forgotten that things come down. But what they remembered is that they could make a lot of money on the way up. So we had a crash in 1929. And in 1933, we got a new administration, Franklin Roosevelt, and the New Deal came in. And they brought in a whole range of legislation to restrict financial markets, to break up the banks, allow commercial banks to do those things, savings and loan banks to do those things. They didn't allow interstate banking. They didn't allow banks and insurance companies to work together. Banks had to keep large ratios of reserves. Banks weren't allowed to pay interest on deposits. Banks this, all these restrictions on banks. Some of them were incoherent, but there were lots of restrictions on banks. The attitude was, the New Deal was like a Jackson Pollock. They were going to throw regulation at the problem until something stuck and looked good. And it worked very well. From 1930s through the 1970s, we did not have a financial crisis. That is the longest period in American history of relatively stable financial markets. And stable, rapid economic growth is the golden age of American capitalism. We had the highest growth rates, the most egalitarian growth in our history. And stable, tightly regulated financial markets were part of it. Then we had forgetting. The idea of this forgetting is associated with the great economist Harman Minsky, who was friends with Galbraith. Well, I don't know if they were friends. I don't know if anybody's friends with John Kenneth Galbraith, he wasn't that type. But they agreed with each other on a lot of things. Minsky saw three phases of financial markets. In the first phase, you have regulation and people behave themselves because they remember what happened last time. Then you get a period when new people come in and they don't really remember what happened and they start questioning the regulations and they start questioning the conservative behavior. And they start saying, why don't we borrow some more and invest it? Why don't we increase our leverage? The ratio of what we have borrowed, what we owe to what we own. Get more leverage and we can increase our profits. And that seems like a good idea because everything's been fine. Why are we being so careful? Everything's fine. So in the second period, you get more leverage and people start making more profits. And then they start saying, why don't we make even more profits? Look how well it's all working. Last time you said we should be more careful and look, we weren't and everything was fine. So let's be even less careful. Let's increase our leverage more. And that's what started happening. The banks wanted more leverage. The financial institutions wanted more leverage. You had insurance companies acting like banks. You had car companies acting like banks. Everybody started jumping in, borrowing to invest. And everybody was getting rich doing it. This was like the people who bought bulbs at $10,000 and sold them for $20,000. And the people who bought them for $20,000 sold them for $40,000. And everybody was getting rich. People started borrowing on the anticipation that we'll be able to get richer. And they started going to the government and saying, stop bothering us with these regulations. We don't need them. We'll behave ourselves. Don't worry. Didn't you read the book on efficient markets? Or didn't you pay attention to the lecture on efficient market theory? Everything will be fine. Just leave us alone. And that's what happened. The government started repealing the New Deal legislation. And they stopped enforcing it where there was still the regulation on. The Federal Reserve started letting the banks do more and more things. Leverage increased. And then it increased more. Then the Securities Exchange Commission, a New Deal agency, allowed the banks to self-evaluate their capital and their loans. So the banks will value this thing the way we want to. And then we'll get away with it. The leverage increased, increased, increased until the point where people who were at all cautious looked stupid. What's the matter? You're holding us, our company back? And you've got this business going in the financial markets where the most radical, the most risk-loving people were the ones making the most money. And everybody started imitating them until the crash. And that's what we'll talk about next time with the housing bubble and the crash. Thanks. Have a good day. Bye-bye.