The pendulum of government regulation is swinging in a new direction. The government spent most of the past three decades dismantling rules put in place to fix the bad practices that led to the Great Depression of the 1930s. President Barack Obama's financial overhaul plan marks a clear step back toward greater regulation.
The country often responds to crises with a raft of new laws and rules designed to keep whatever caused the crisis from happening again.
Washington is home to many large federal buildings that stand as monuments to past bursts of crisis-driven government intervention: the Commerce Department, Federal Reserve, the Securities and Exchange Commission and the departments of Housing and Urban Development, Energy, and Homeland Security.
There's always a risk of going too far on the regulation or deregulation side. And later corrections in the opposite direction have been common. Either way, the buildings full of federal workers remain.
"In theory, regulation and markets should evolve together. In fact, almost always, regulation comes after disasters" and it isn't always for the better, said John Steele Gordon, an economic historian and author of the book "The Great Game: The Emergence of Wall Street as a World Power."
"Disasters teach us how to prevent the last disaster," he said.
The Obama revamp plan unveiled Wednesday asks Congress to give the Federal Reserve new powers to oversee the biggest financial players whose failure could imperil the economy and place stiff capital requirements on them. In addition, the plan would empower a council of regulators that would police the entire financial system for risky products.
New powers would be provided to safely wind down giant financial institutions on the verge of collapse. And, it would create a new consumer protection agency to guard against credit and other abuses that played a big role in the current crisis.
Obama said it was designed to end the greedy practices and risk-taking that led to the severest downturn since the Great Depression while seeking "a careful balance" against too much regulation.
President Ronald Reagan — with his mantra that government was not the solution but the problem to the nation's woes — is usually credited with beginning the unwinding of federal regulations in the early 1980s.
He argued for setting free the mighty engine of capitalism and persuaded Congress to deregulate many businesses. Distinctions between commercial and savings banks were eliminated during his presidency.
But the move toward deregulation was well under way under predecessor Jimmy Carter, who pushed for the lifting of federal controls on airlines, trucking, railroads and natural gas.
There was a brief bout with reregulation in the late 1980s and early 1990s, as the government seized control of more than 1,000 failed savings and loans.
But then President Bill Clinton took financial deregulation a step further, signing a bipartisan bill in 1999 that ended the 1930s-era barrier between banks and investment and insurance companies — but without subjecting those institutions to the same rules that applied to regular banks.
That gave rise to huge one-stop shopping financial supermarkets. In a light regulatory climate and with easy monetary policies by the Fed, all sorts of complicated financial instruments were packaged and sold to investors, many based on shaky mortgages that later turned out to be extremely vulnerable to a housing downturn.
Obama's plan builds on a proposal by former Treasury Secretary Henry Paulson and accelerates a move toward re-regulation that had its beginning in a 2002 law to crack down on corporate fraud and accounting practices following the Enron and Worldcom accounting scandals.
The White House and its backers said the plan would prevent another near-collapse of the nation's financial system. Some critics said it gave the Fed too much power, others said it didn't go far enough.
The plan may be just "adding another layer of bureaucracy to an overcrowded regulatory framework," said Joseph Lynyak, an attorney who represents banks and other financial institutions before federal and state regulatory agencies.
Richard Spillenkothen, the Fed's former top banking regulator who left in 2006 and is now a director at Deloitte & Touche LLP's regulatory and capital markets consulting practice, called the plan "a major turning point. ... You are going to see a much more heightened role by the government in the regulatory process."
"I think these tools will be helpful in improving the odds that regulators will identify or head off problems. But there are no guarantees in life. There are things that can happen that can't be anticipated," he added.
Federal financial regulation has been back and forth throughout history, with cycles of relatively light regulation followed by crackdowns.
When President Andrew Jackson did away with the Bank of the United States, it led to the 1837 panic on Wall Street but also ushered in a decades-long period in which the federal government essentially kept its hands off financial markets.
In the late 19th century, huge business monopolies and trusts took advantage of weak government oversight to control markets and put a stranglehold on the U.S. economy. That fed a rise in public sentiment for government regulation.
The result was the Sherman Antitrust Act in 1890 and the trust-busting in the early 1900s by President Theodore Roosevelt. Roosevelt persuaded Congress to establish a new-Cabinet level Department of Commerce and Labor to expand regulation and monitoring.
In 1907, the economy was again weakening, leading a number of businesses and Wall Street brokerages to go bankrupt. By the fall, the Knickerbocker Trust Co. in New York City and the Westinghouse Electric Co. both failed, touching off the Panic of 1907. Stock market prices plunged and customers made a run on banks.
The crisis led to legislation setting up the Fed, which President Woodrow Wilson signed into law on Dec. 23, 1913.
The Fed's mission: provide the country with economic and price stability and oversee the safety and soundness of U.S. banks.
Over the years, the Fed's role in banking and the economy has expanded. It is considered to be an independent central bank because its decisions don't have to be approved by the president or anyone else in the executive branch.
In the "Roaring 20s" following the end of World War I, wild stock market speculation, easy credit and shaky banking practices led to the 1929 stock market crash that ushered in the Great Depression.
The Securities and Exchange Commission was then created to restore investor confidence and faith in the financial system. Through the 1930s, other regulatory and oversight commissions and public-works programs also were put in place under President Franklin D. Roosevelt as the government took an increasingly active role in managing the economy.
But the popularity of strong government financial regulation began to fade in the bull markets of the 1980s and 1990s.
Each of the nation's major financial crises has something in common: each prompted the government to "look into what caused it and then there's a big swing of the pendulum to re-regulation," said Ken Thomas, a lecturer in finance at the University of Pennsylvania's Wharton School.
"When things get better, the government will start deregulating and sow the seeds for the next crisis."