Question

In what way, if any did the Financial Services Modernization Act of 1999 & Glass-Steagall Act help accelerate a financial crisis?

Answer 1

The Financial Services Modernization Act of 1999 also known as Gramm leach Bliley Act repealed the Glass Steagall Act of 1933.This effectively resulted in deregulation which permitted banks to trade in derivatives using their deposits.The was followed by the exemption of the credit default swaps and other derivatives from regulation.this led to the rise of mortgage backed securities which was gaining demand due to it's risk free nature since it was backed by major insurance companies.The rise in demand of mortgage backed securities and other derivatives resulted in banks approving more loans to even people with questionable credit.This combined with the lowering of the fed rate to 1.25% resulted in higher demand for mortgage loans as more and more people started to buy homes for low interest payments.This continued till thr rise in Fed rate to 5.25% this resulted in many individuals who had taken mortgages defaulting on their payments.Eventually this caused the housing crisis and since mortgage backed securities were in high demand many investment banks were heavily invested in theses types of derivatives.The fall of the housing sector spread to the stock market and thus resulted in the financial crisis of 2008.Thus the Financial Services Modernization Act of 1999 accelerated the financial crisis.