Seven Deadly Sins of Deregulation -- and Three Necessary Reforms

[Joe Steel]

The current carnage on Wall Street, with dire spillover effects on Main Street, is the result of a failed ideology -- the idea that financial markets could regulate themselves. Serial deregulation fed on itself. Deliberate repeal of regulations became entangled with failure to carry out laws still on the books. Corruption mingled with simple incompetence. And though the ideology was largely Republican, it was abetted by Wall Street Democrats.

Why regulate? As we have seen ever since the sub-prime market blew up in the summer of 2007, government cannot stand by when a financial crash threatens to turn into a general depression -- even a government like the Bush administration that fervently believes in free markets. But if government must act to contain wider damage when large banks fail, then it is obliged to act to prevent damage from occurring in the first place. Otherwise, the result is what economists term "moral hazard"-- an invitation to take excessive risks.

Government, under Franklin Roosevelt, got serious about regulating financial markets after the first cycle of financial bubble and economic ruin in the 1920s. Then, as now, the abuses were complex in their detail but very simple in their essence. They included the sale of complex securities packaged in deceptive and misleading ways; far too much borrowing to finance speculative investments; and gross conflicts of interest on the part of insiders who stood to profit from flim-flams. When the speculative bubble burst in 1929, sellers overwhelmed buyers, many investors were wiped out, and the system of credit contracted, choking the rest of the economy.

In the 1930s, the Roosevelt administration acted to prevent a repetition of the ruinous 1920s. Commercial banks were separated from investment banks, so that bankers could not prosper by underwriting bogus securities and foisting them on retail customers. Leverage was limited in order to rein in speculation with borrowed money. Investment banks, stock exchanges, and companies that publicly traded stocks were required to disclose more information to investors. Pyramid schemes and conflicts of interest were limited. The system worked very nicely until the 1970s -- when financial innovators devised end-runs around the regulated system, and regulators stopped keeping up with them.

Seven Deadly Sins of Deregulation -- and Three Necessary Reforms

The most interesting part of this article is in Sin Three:

"The Democratic Congress anticipated this problem in 1994, when it passed the Homeownership Opportunity and Equity Protection Act. This prescient law required the Federal Reserve to regulate the loan-origination standards of mortgage companies that were not otherwise government-regulated. But Alan Greenspan, a free-market zealot, never implemented the law. And when Republicans took over Congress in 1995, they never called him on the carpet.

There you have it. The Democrats tried to fix the problem but the Republicons stopped them.

[midcan5]

Joe, an excellent piece and a topic that the left and the democrats have recognized and pushed for since FDR. It is amazing the accomplishments of good people. You're about to hear the same old nonsense from the conservative echo chamber on this board. Having negative rep is a sign of honor and honesty. keep up the good work.



"This is the Bush-McCain economy. Senator McCain may have forgotten, but President Bush already tried his economic policies and the results are not good. We have just been through a business cycle in which the wage of the typical worker and the typical working family fell. This is the first time that has ever happened."

http://www.commondreams.org/view/2008/09/09-3

[Nukeman]

Joe, an excellent piece and a topic that the left and the democrats have recognized and pushed for since FDR. It is amazing the accomplishments of good people. You're about to hear the same old nonsense from the conservative echo chamber on this board. Having negative rep is a sign of honor and honesty. keep up the good work.



"This is the Bush-McCain economy. Senator McCain may have forgotten, but President Bush already tried his economic policies and the results are not good. We have just been through a business cycle in which the wage of the typical worker and the typical working family fell. This is the first time that has ever happened."

http://www.commondreams.org/view/2008/09/09-3

I would like to call attention to another post of YOURS

Shattering the Glass-Steagall Act By William Kaufman

"If you're looking for a major cause of the current banking meltdown, you need seek no farther than the 1999 repeal of the Glass-Steagall Act.

The Glass-Steagall Act, passed in 1933, mandated the separation of commercial and investment banking in order to protect depositors from the hazards of risky investment and speculation. It worked fine for fifty years until the banking industry began lobbying for its repeal during the 1980s, the go-go years of Reaganesque market fundamentalism, an outlook embraced wholeheartedly by mainstream Democrats under the rubric "neoliberalism."

The main cheerleader for the repeal was Phil Gramm, the fulsome reactionary who, until he recently shoved his foot even farther into his mouth than usual, was McCain's chief economic advisor.

But wait . . . as usual, the Democrats were eager to pile on to this reversal of New Deal regulatory progressivism -- fully 38 of 45 Senate Democrats voted for the repeal (which passed 90-8), including some famous names commonly associated with "progressive" politics by the easily gulled: Dodd, Kennedy, Kerry, Reid, and Schumer. And, of course, there was the inevitable shout of "yea" from the ever-servile corporate factotum Joseph Biden, Barack Obama's idea of a tribune of "change"--if by change one means erasing any lingering obstacle to corporate domination of the polity.

This disgraceful bow to the banking industry, eagerly signed into law by Bill Clinton in 1999, bears a major share of responsibility for the current banking crisis. Here's the complete roll call of shame:"

Tru to form you are talking out of both sides of your mouth.

So which is it midcan, is the dems, the repubs, or was it BOTH?????

You and joe are so quick to jump on anthing that points a finger to the repubs, yet you are willing to let the dems get a pass even when YOU post they had a major influence of the current financial mess..... hypocrit!!!!!

[Joe Steel]

Joe, an excellent piece and a topic that the left and the democrats have recognized and pushed for since FDR. It is amazing the accomplishments of good people. You're about to hear the same old nonsense from the conservative echo chamber on this board. Having negative rep is a sign of honor and honesty. keep up the good work.

Thanks.

This is a complicated subject and thought this article summed it up very well.