It seems that a lot of so-called experts are in a quandary over how Wall Street became a den of pirates and scam artists. “How did this happen”, they ask. “Why didn’t those regulatory agencies regulate?” they howl.
Well, can we say, Ronald Reagan, deregulation, “starve the beast,” defund regulatory agencies, Bush I, Bush II, Clinton, and several complacent sessions of Congress?
Many of those who keep yammering about “big government” don’t understand that some government, some regulation is necessary to level the playing field between mega-corporations, banks and Johnnie in the Street. The individual stock purchaser, insurance policy holder, homeowner, renter, or private person does not have the knowledge or means to go up against mega-corporations
Equally complicit with Madoff and a host of alleged white-collar criminals in the investment sector are several sessions of Congress. Congress went along with much of the deregulation, particularly under the watch of former President Bill Clinton.
Back in 1999, when the legislation was being considered, critics predicted massive industry mergers, with banks getting into the insurance business and other previously prohibited industries. Speaking of the consequences of the Clinton Era legislation, author Martin McLaughlin noted:
The certain result of repeal of Glass-Steagall will be a wave of mergers surpassing even the colossal combinations of the past several years. The Wall Street Journal wrote, "With the stroke of the president's pen, investment firms like Merrill Lynch & Co. and banks like Bank of America Corp., are expected to be on the prowl for acquisitions." The financial press predicted that the most likely mergers would come from big banks acquiring insurance companies, with John Hancock, Prudential and The Hartford all expected to be targeted. (Martin McLaughlin, “Clinton, Republicans Agree to Deregulation of US Financial System”)
Both Clinton and Reagan ignored a 60-year-old history of post-Depression Era bank industry stability regulatory, which was generated by FDR’s banking regulations, which were a major part of the New Deal.
The main problem with Reagan’s outlook was a failure to recognize that government regulation can serve business interests quite effectively. Many of the regulatory programs started by Franklin D. Roosevelt’s New Deal in the 1930s aimed to promote fairness in economic competition. That legislation required greater transparency so that investors could more intelligently judge the value of securities in the stock market. The reforms mandated a separation of commercial and investment bank activities, since speculative investments by commercial banks had been one of the principal causes of the financial crash. Roosevelt’s New Deal also created a bank insurance program, the FDIC, which brought stability to a finance industry that had been on the verge of collapse. (Robert Brent Toplin, “Blame Ronald Reagan For Our Current Economic Crisis”, History News Network)
So, here we are 75 years later, back in the same old catastrophic nightmare. Banks are failing left and right, after gobbling up insurance companies, mortgage companies, and investment brokerages. The toxic domino effect took down the economy 70 years ago has come back with a vengeance, with the aid of greedy speculators, oft finically illiterate homeowners and investors and an industry-friendly, emasculated regulatory system.
The system is so industry friendly, apparently, that when an investigator put a gift-wrapped investigation in their lap, they tossed it. Getting in bed with the target of an investigation is usually a no-no for investigators, but apparently not at the SEC.
Apparently, many governments didn’t learn from Enron. In 2002, an Indian publication faulted American regulatory agencies for being too close to the companies they regulated, but the author said that American under investigation for investment irregularities may have been friends of the President, but they weren’t openly sitting on US regulatory boards:
The financial scams tumbling out of corporate America’s closets rattled the Prime Minister enough for him to threaten increased regulatory measures to strengthen good governance practices. It would be nice if the PM took a careful look at what is happening in the US. It is true that Kenneth Lay was a buddy of George W Bush, but he isn’t sitting on his Bush’s industrial advisory council after Enron began to default on its financial commitments. Click here.
Yet, while the Indian press blasted the Americans, they really skewered the Indian government for even more egregious violations of common sense. Referring to industry regulations, a columnist Sucheta Dalal accused the Indian government of creating a maze of regulatory impediments to good governance.
We, on the other hand have developed a wonderful multi-layered system to protect crooked industrialists and officials who collude with them. Statutes such as Sica and BIFR shelter companies and public financial institutions and banks provide the oxygen. Now that non-performing assets have ballooned to Rs 1.5 lakh crore (Ernst and Young’s estimate) and the lenders too have turned sick (IFCI Ltd. and Unit Trust of India’s double debacle) they are kept alive with taxpayers’ money doled out by the exchequer. (Ibid)
Now, while the United States may, or may not have a ‘wonderful multi-layered system to protect crooked industrialists and officials who collude with them’ (Ibid), there is a question of which came first, the chicken or the egg?
Some say the banking and investment regulators who work for the feds have far to cozy a relationship with the banks and investment companies they allegedly regulate. On the other hand, other critics say the taint comes from top down management by political appointees who run the agencies from an ideological perspective. Referring to different management styles and problems with the Security Exchange Commission (SEC), blogger Robert Brown wrote that: