I want to thank Mayor Bloomberg for his extraordinary leadership. At a time when Washington is divided in old ideological battles, he shows us what can be achieved when we bring people together to seek pragmatic solutions. Not only has he been a remarkable leader for New York –he has established himself as a major voice in our national debate on issues like renewing our economy, educating our children, and seeking energy independence. Mr. Mayor, I share your determination to bring this country together to finally make progress for the American people.
In a city of landmarks, we meet at Cooper Union, just uptown from Federal Hall, where George Washington took the oath of office as the first President of the United States. With all the history that has passed through the narrow canyons of lower Manhattan, it is worth taking a moment to reflect on the role that the market has played in the development of the American story.
The great task before our Founders that day was putting into practice the ideal that government could simultaneously serve liberty and advance the common good. For Alexander Hamilton, the young Secretary of the Treasury, that task was bound to the vigor of the American economy.
Hamilton had a strong belief in the power of the market. But he balanced that belief with the conviction that human enterprise “may be beneficially stimulated by prudent aids and encouragements on the part of the government.” Government, he believed, had an important role to play in advancing our common prosperity. So he nationalized the state Revolutionary War debts, weaving together the economies of the states and creating an American system of credit and capital markets. And he encouraged manufacturing and infrastructure, so products could be moved to market.
Hamilton met fierce opposition from Thomas Jefferson, who worried that this brand of capitalism would favor the interests of the few over the many. Jefferson preferred an agrarian economy because he believed that it would give individual landowners freedom, and that this freedom would nurture our democratic institutions. But despite their differences, there was one thing that Jefferson and Hamilton agreed on – that economic growth depended upon the talent and ingenuity of the American people; that in order to harness that talent, opportunity had to remain open to all; and that through education in particular, every American could climb the ladder of social and economic mobility, and achieve the American Dream.
In the more than two centuries since then, we have struggled to balance the same forces that confronted Hamilton and Jefferson – self-interest and community; markets and democracy; the concentration of wealth and power, and the necessity of transparency and opportunity for each and every citizen. Throughout this saga, Americans have pursued their dreams within a free market that has been the engine of America’s progress. It’s a market that has created a prosperity that is the envy of the world, and opportunity for generations of Americans. A market that has provided great rewards to the innovators and risk-takers who have made America a beacon for science, and technology, and discovery.
But the American experiment has worked in large part because we have guided the market’s invisible hand with a higher principle. Our free market was never meant to be a free license to take whatever you can get, however you can get it. That is why we have put in place rules of the road to make competition fair, and open, and honest. We have done this not to stifle – but rather to advance prosperity and liberty. As I said at NASDAQ last September: the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well being of American business, its capital markets, and the American people are aligned.
I think all of us here today would acknowledge that we’ve lost that sense of shared prosperity.
This loss has not happened by accident. It’s because of decisions made in boardrooms, on trading floors and in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both.
Nor is this trend new. The concentrations of economic power – and the failures of our political system to protect the American economy from its worst excesses – have been a staple of our past, most famously in the 1920s, when with success we ended up plunging the country into the Great Depression. That is when government stepped in to create a series of regulatory structures – from the FDIC to the Glass-Steagall Act – to serve as a corrective to protect the American people and American business.
Ironically, it was in reaction to the high taxes and some of the outmoded structures of the New Deal that both individuals and institutions began pushing for changes to this regulatory structure. But instead of sensible reform that rewarded success and freed the creative forces of the market, too often we’ve excused and even embraced an ethic of greed, corner cutting and inside dealing that has always threatened the long-term stability of our economic system. Too often, we’ve lost that common stake in each other’s prosperity.
Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform – to foster competition, lower prices, or replace outdated oversight structures. Old institutions cannot adequately oversee new practices. Old rules may not fit the roads where our economy is leading. There were good arguments for changing the rules of the road in the 1990s. Our economy was undergoing a fundamental shift, carried along by the swift currents of technological change and globalization. For the sake of our common prosperity, we needed to adapt to keep markets competitive and fair.
Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one – aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so, we encouraged a winner take all, anything goes environment that helped foster devastating dislocations in our economy.
Deregulation of the telecommunications sector, for example, fostered competition but also contributed to massive over-investment. Partial deregulation of the electricity sector enabled market manipulation. Companies like Enron and WorldCom took advantage of the new regulatory environment to push the envelope, pump up earnings, disguise losses and otherwise engage in accounting fraud to make their profits look better – a practice that led investors to question the balance sheet of all companies, and severely damaged public trust in capital markets. This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment.
A decade later, we have deregulated the financial services sector, and we face another crisis. A regulatory structure set up for banks in the 1930s needed to change because the nature of business has changed. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.
Since then, we have overseen 21st century innovation – including the aggressive introduction of new and complex financial instruments like hedge funds and non-bank financial companies – with outdated 20th century regulatory tools. New conflicts of interest recalled the worst excesses of the past – like the outrageous news that we learned just yesterday of KPMG allowing a lender to report profits instead of losses, so that both parties could make a quick buck. Not surprisingly, the regulatory environment failed to keep pace. When subprime mortgage lending took a reckless and unsustainable turn, a patchwork of regulators were unable or unwilling to protect the American people.