Financial Meltdown 101

By Arun Gupta, Indypendent
Posted on October 13, 2008, Printed on December 27, 2008
http://www.alternet.org/story/102672/

AlterNet is resurfacing some of the best and most popular articles published in 2008 as the year comes to a close. In this piece published this fall, Arun Gupta helps makes sense of these confusing economic times.

From 1982 to 2000, the U.S. stock market went on the longest bull run ever, as share prices rose to dizzying heights. In the late 1990s, a combination of factors, which included the Federal Reserve lowering interest rates, created a huge price bubble in Internet stocks. A speculative bubble occurs when price far outstrips the fundamental worth of the asset. Bubbles have occurred in everything from real estate, stocks and railroads to tulips, beanie babies and comic books. As with all bubbles, it took more and more money to make a return*. This led to the Internet bubble popping in March 2000.

During this time of market mania, the Fed guts the Glass-Steagall Act, which was enacted during the Great Depression to prevent the type of banking activity that led to the 1929 stock market crash. In 1996, the Fed allows regular banks to become heavily involved in investment banking, which opens the door to conflicts of interest in banks pushing sketchy financial products on customers who poorly understood the risks. In 1999, under intense pressure from financial firms, Congress overturns Glass-Steagall, allowing banks to engage in any sort of activity from underwriting insurance to investment banking to commercial banking (such as holding deposits).