“The Kareken and Wallace model’s prediction is that if a government sets up deposit insurance and doesn’t regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis.”
The Republican sponsored Financial Services Modernization Act of 1999 allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate. They immediately began taking on increased risk and was a large contributor to the collapse of our economy.
He went on to criticize the Reagan administration and the deregulation that occurred just before the S&L scandal and bailout.
If you’re going to deregulate financial institutions, which we in the United States did in the late ’70s and early ’80s, you’d better reform deposit insurance first. You’d better make it clear that financial institutions that take these risks are not allowed to have access to lender-of-last-resort facilities. But the U.S. government didn’t do that.