Legal stability helps ensure that citizens and businesses can manage their affairs efficiently (Lindquist & Cross, 2010). The order of the legal system helps to guarantee that all cases will be heard equally. Legislatures create laws that protect citizens and business, and when these laws are broken, the court system is used to reprimand the offenders. The court system is organized into two court structures, the federal system and state system (Kubasek, Brennan, & Browne 2009). There is a specific order to the organization to the court system and court proceedings, and this order promotes the stability of the legal system. Every player in the court system knows what to expect regarding their trial, and this predictability is important to ensure that the legal system is fair to all participants. Businesses and citizens alike benefit from a stable legal system because the laws are known and disputes are handled reasonably.
The enactment of the Gramm-Leach-Bliley Act in 1999 is one example where an action of the legal system caused instability in business and society. The act repealed the Banking Act of 1933, or the Glass-Steagall Act, that prohibited banks from selling securities (Barth, Brumbaugh Jr., & Wilcox, 2000). It also repealed the Bank Holding Act of 1956 that kept banking separate from insurance business. These acts were repealed because academics showed that banks being involved in the sale of securities and insurance did not cause the Great Depression of 1929 (Barth et al., 2000). The fact that banks were allowed minimal sales of insurance and securities with little problem also helped this act to pass. This deregulation of banking contributed to the financial crisis of 2008. The repeal of the Glass-Steagall Act allowed investment and commercial banking to merge, which led to higher capital ratios and lower risk (Bordo, 2008). As a result, normal lending practices were relaxed, and when the subprime mortgage market collapsed in 2007, many banks felt the repercussions. Defaulted mortgages effected the economy and caused a significant recession that affected citizens and businesses alike (Bordo, 2008).
Major changes in banking regulations through the Gramm-Leach-Bliley Act is just one example where alleged failure in the legal system lead to instability in business and society. This instability shows the importance of having predictability in the legal system. The Glass-Steagall Act had been in place for over six decades when it was finally repelled in 1999 (Barth et al., 2000). While research showed that repelling this act would help create a more universal banking system, the deregulation of the banking system caused more corruption instead (Bordo, 2008). Banks were allowed to undertake even more activities than before. These extra activities and the vagueness of the Gramm-Leach-Bliley Act helped to contribute to the instability of the financial sector. When the legal system helps to contribute to instability, more citizens become wary of both the legal system and the financial sector. In order to avoid this problem in the future, the legal system should be more predictable by keeping regulations that protect the people in place.
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