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ZaneTannirFirstEssay 2 - 20 Feb 2025 - Main.ZaneTannir
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< | | | | It is strongly recommended that you include your outline in the body of your essay by using the outline as section titles. The headings below are there to remind you how section and subsection titles are formatted. | | | It is strongly recommended that you include your outline in the body of your essay by using the outline as section titles. The headings below are there to remind you how section and subsection titles are formatted. | |
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> | Lebanon’s Economic Collapse and the Role of Regulatory Failure | | | -- By ZaneTannir - 19 Feb 2025 | |
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> | Living in Lebanon in 2019, I witnessed first-hand the devastation that occurs when a financial system is left unregulated. I watched my parents, teachers, and friends suffer as banks closed their doors and halted withdrawals as the economy fell apart. Even now, five and a half years later, I see a news clip every other week of men entering a bank with firearms, not to steal others' money, but to beg for access to their own so they can pay for food or water or their mother’s cancer treatment. I read about suicides by fathers ashamed that they could no longer provide for their families, using their last words to apologize for situations they had no part in creating.
Lebanon’s economic collapse was a multifaceted disaster, often attributed to a confluence of corruption, geopolitical instability, and terrorism. However, these factors obscure another crucial contributor, the absence of robust financial regulation, which allowed for reckless monetary policy, Ponzi-like banking practices, and concentrated market power that ultimately precipitated the crisis. Had Lebanon instituted stricter regulatory frameworks, the collapse might have been delayed, and the effects mitigated.
A Financial System Without Guardrails
Financial integrity is the foundation of any sustainable economy. Lebanon’s system, however, functioned without meaningful oversight, leaving it vulnerable to abuse. The Central Bank, BDL, adopted policies that encouraged the illusion of stability while instead compounding economic fragility. It extended generous loans to commercial banks, enabling these banks to entice depositors with unrealistically high interest rates to attract foreign currency, resulting in what was effectively a government-sanctioned Ponzi scheme. To finance government deficits, the central bank resorted to excessive money printing, accelerating inflation and devaluing the Lebanese lira. The government clung to a rigid dollar peg, artificially maintaining an exchange rate of 1,500 LBP to 1 USD, despite mounting trade deficits and capital flight that rendered this rate unsustainable. This system relied on continuous inflows of foreign capital, primarily remittances from the Lebanese diaspora, but when these inflows slowed, the entire structure collapsed.
The Monopoly Economy | | | | |
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> | Another pillar of Lebanon’s economic dysfunction was its entrenched system of government-authorized monopolies. The country’s economy has long been dominated by a handful of politically connected families who control key industries such as telecommunications, energy, and banking. These monopolies created artificial barriers to entry, stifled competition, and maintained exorbitant prices for essential goods and services. The lack of regulatory oversight enabled these monopolies to consolidate power, exacerbating economic inequality and limiting opportunities for growth and innovation. | | | | |
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> | Financial Engineering | | | | |
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> | Regulatory oversight could have mitigated the economy’s vulnerabilities by enforcing prudent lending practices, restricting speculative investments, and incentivizing local production. Instead, Lebanon’s banks, in collusion with the government, engaged in high-risk financial engineering to mask the country’s economic fragility. They utilized circular lending, where banks borrowed from each other to artificially inflate balance sheets, giving the illusion of stability while deepening systemic risks. Additionally, they borrowed heavily against dwindling foreign reserves to maintain the dollar peg, creating an unsustainable feedback loop of debt. In some cases, financial institutions misrepresented their assets and liabilities, masking the true extent of their insolvency and luring depositors into a false sense of security. These deceptive tactics further entrenched the inevitable economic collapse, ensuring that when it came, it was more devastating than if corrective measures had been taken earlier. | | | | |
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> | Integrity and the United States | | | | |
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> | Locke’s social contract theory suggests that governments exist to serve and protect the rights and well-being of their citizens. By failing to regulate its financial system, Lebanon’s government betrayed this fundamental social contract. It permitted an economic structure without integrity that enriched the few at the expense of the many, leading to immense suffering and societal breakdown. In contrast, a regulatory framework rooted in fairness and accountability could have upheld the integrity of the system, preventing its total disintegration. | | | | |
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> | Integrity is not merely an ethical principle, it is an economic necessity. Professor Mahmoud El-Gamal once told my class that a viable financial system relies on the interaction of the private and public sector. The private sector creates returns on investments, growing the economy, while the public sector keeps it in check, ensuring the system is not abused by large institutions. He explained how too many intelligent people are flocking to the private sector because of its lucrativeness, leaving few on the regulatory side to prevent the system from being exploited, leading to its ultimate collapse and failure. | | | | |
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> | Professor Gamal’s statement was my impetus for attending law school, hoping to contribute to financial regulation in the United States in order to prevent the devastating consequences of regulatory failure that I witnessed in Lebanon from happening here. However, as time passes and I creep closer to entering the regulatory system, I realize that much like Lebanon, the U.S. government has betrayed the social contract by prioritizing the interests of financial institutions over those of the public. The revolving door between regulatory agencies and the financial institutions they are meant to oversee, corporate lobbying and Super PACs that allow companies to influence lawmakers unabashedly, and ponzi-schemes propped up by the government through entities like Fannie Mae and Freddie Mac mirrors the same erosion of integrity that led to Lebanon’s downfall. | | | | |
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> | While the institutions in the U.S. are stronger and more resilient, able to be bailed out by the government as they were in 2008, the underlying dynamic of regulatory capture and political entanglement with corporate interests presents extremely troubling parallels. My fears have only grown since Trump has taken office and I’ve witnessed him and Elon Musk dismantle regulatory institutions across all industries, with the Federal Reserve and SEC likely up next, in a manner even Lebanese politicians are envious of. I’ve begun to wonder if working within the regulatory system may be futile, and I fear the American people, much like the Lebanese, may ultimately bear the consequences of a system that serves the few at the expense of the many. | | | | |
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> | Bibliography | | | | |
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> | International Monetary Fund. Lebanon: 2023 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Lebanon. IMF Country Report No. 23/237, 18 May 2023. International Monetary Fund, Washington, D.C. | | | | |
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> | Locke, John. Two Treatises of Government. Edited by Peter Laslett, Cambridge University Press, 1988. | | | | |
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> | World Bank. Lebanon Economic Monitor: Lebanon Sinking (To the Top 3). Spring 2021. World Bank, Washington, D.C. | | |
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ZaneTannirFirstEssay 1 - 19 Feb 2025 - Main.ZaneTannir
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It is strongly recommended that you include your outline in the body of your essay by using the outline as section titles. The headings below are there to remind you how section and subsection titles are formatted.
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-- By ZaneTannir - 19 Feb 2025
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