Classical Economics versus Keynesian Economics. Two conflicting Economic systems both with pros and cons. Classical Economic theory of economist Adam Smith in the late 18th century. Keynesian economics is the alternative to Classical Economics which was constructed in the 20th century preceding the Great Depression and used by economists and governments around the world to formulate government policies to regulate the economy and improve society. There are flaws in both economic theories.
Keynesian economics strongly supports government intervention when needed and encourages increased government spending and building of infrastructure when the private sector is struggling. When the economy improves then less spending is needed. Keynesian economics turned things around and brought US economy back from the dead following the Great Depression. Regulations and acts were introduced following the Great Depression and rebuilt the US economy. The US economy peaked in the 1920's due to market deregulations and over valuation of assets which collapsed and corrected itself- establishment of a new market equilibrium through the use of Smith's Invisible Hand.
Shadow banking system taking over the conventional banking system. Deregulation brought about a lack of financial controls and regulations. There was no international gold standard to set currency rates: currency exchange rates could be manipulated. Shadow banking system played a major role in the GFC and the economic chaos in Europe and the US. Countries in South America and Asia with limited exposure to the Shadow banking system felt a smaller financial impact. The regulations and controls implemented into the financial system were gradually removed over time which lead to the rise of the shadow market, fiat capital and the Wall Street Swindlers bankrupted America and the world through their greed and corruption.
http://en.wikipedia.org/wiki/Shadow_banking_system
Nobel laureate Paul Krugman described the run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible--and they should have responded by extending regulations and the financial safety net to cover these new institutions.
Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect."
"...One Ring to rule them all, One Ring to find them,
One Ring to bring them all and in the darkness bind them..." – J.R.R. Tolki
