The deregulation lie
The financial instruments that have been responsible for much of the credit problems have never been regulated. They were always exempt securities or traded in exempt transactions under the securities laws. Generally, securities sold by one bank to another bank or financial institution are exempt from all but the fraud provisions of the securities laws. this has been the case since the early 1930s when the major securities acts were first passed.In each of the first two presidential debates, Barack Obama claimed that "Republican deregulation" is responsible for the financial crisis. Most viewers probably accepted this idea, especially because Republicans generally do favor deregulation.
But one essential fact was missing from the senator's narrative: While there has been significant deregulation in the U.S. economy during the last 30 years, none of it has occurred in the financial sector. Indeed, the only significant legislation with any effect on financial risk-taking was the Federal Deposit Insurance Corporation Improvement Act of 1991, adopted during the first Bush administration in the wake of the collapse of the savings and loans (S&Ls). FDICIA, however, substantially tightened commercial bank and S&L regulations, including prompt corrective action when a bank's capital declines below adequate levels and severe personal fines if management violates laws or regulations.
If Sen. Obama had been asked for an example of "Republican deregulation," he would probably have cited the Gramm-Leach-Bliley Act of 1999 (GLBA), which has become a popular target for Democrats searching for something to pin on the GOP. This is puzzling. The bill's key sponsors were indeed Republicans, but the bill was supported by the Clinton administration and signed by President Clinton. The GLBA's "repeal" of a portion of the Glass-Steagall Act of 1933 is said to have somehow contributed to the current financial meltdown. Nonsense.
Adopted early in the New Deal, the Glass-Steagall Act separated investment and commercial banking. It prohibited commercial banks from underwriting or dealing in securities, and from affiliating with firms that engaged principally in that business. The GLBA repealed only the second of these provisions, allowing banks and securities firms to be affiliated under the same holding company. Thus J.P. Morgan Chase was able to acquire Bear Stearns, and Bank of America could acquire Merrill Lynch. Nevertheless, banks themselves were and still are prohibited from underwriting or dealing in securities.
Allowing banks and securities firms to affiliate under the same holding company has had no effect on the current financial crisis. None of the investment banks that have gotten into trouble -- Bear, Lehman, Merrill, Goldman or Morgan Stanley -- were affiliated with commercial banks. And none of the banks that have major securities affiliates -- Citibank, Bank of America, and J.P. Morgan Chase, to name a few -- are among the banks that have thus far encountered serious financial problems. Indeed, the ability of these banks to diversify into nonbanking activities has been a source of their strength.
Most important, the banks that have succumbed to financial problems -- Wachovia, Washington Mutual and IndyMac, among others -- got into trouble by investing in bad mortgages or mortgage-backed securities, not because of the securities activities of an affiliated securities firm. Federal Reserve regulations significantly restrict transactions between banks and their affiliates.
If Sen. Obama were truly looking for a kind of deregulation that might be responsible for the current financial crisis, he need only look back to 1998, when the Clinton administration ruled that Fannie Mae and Freddie Mac could satisfy their affordable housing obligations by purchasing subprime mortgages. This ultimately made it possible for Fannie and Freddie to add a trillion dollars in junk loans to their balance sheets. This led to their own collapse, and to the development of a market in these mortgages that is the source of the financial crisis we are wrestling with today.
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Fannie and Freddie were supposed to be supervised by Congress but the Democrats in Congress pushed them into buying sub prime mortgages which precipitated their downfall. Right now, the Democrats and Obama have a good scam going on the deregulation issue, but if 10B-5 applied to their political speech they would be guilty of fraud.
Republican deregulation does not consist only in legislation that was passed or not passed. There has not been much financial legislation passed in recent years. Republican deregulation ALSO consists of a Republican administration sending out orders to ignore regulations or to enforce them weakly. This has happened a whole lot over the last eight years.
ReplyDeleteOne agency whose chairman was appointed by President Bush, the Securities and Exchange Commission (SEC), has admitted to allowing Wall Street to be regulated through a program called “voluntary regulation,” and it has also admitted that the voluntary regulation program did not work and that the program helped to cause the meltdown.
How? Because banks, investment banks, insurance companies etc were allowed to hold assets in “off balance sheet” companies and no regulator insisted that those assets had to be disclosed for the good of investors and the safety of the system.
The SEC’s failure to regulate Wall Street, and the Federal Reserve’s willingness to allow banks to have 33-to-1 debt/equity ratios are very similar to the Environmental Protection Administration (EPA)’s loosening of the clean water regulations.
See: EPA ignores the toxic threat in our drinking water
http://www.sltrib.com/opinion/ci_10697784
And see:
E.P.A. TO ABANDON NEW ARSENIC LIMITS FOR WATER SUPPLY
http://query.nytimes.com/gst/fullpage.html?res=9C05E2DE1F3DF932A15750C0A9679C8B63
And then there was the move to end mandatory testing for testing for salmonella in hamburger meat served in federal school lunch programs.
http://www.mindfully.org/Food/Irradiate-School-Beef.htm
To its credit, the Bush Administration later reversed its policy on ending that testing, after an outcry.
Bush Administration Reverses Position on Salmonella Testing of School Lunch Beef
http://findarticles.com/p/articles/mi_m0EUY/is_14_7/ai_73121533
And then there were the changes to the Clean Air regulations:
Bush Administration Eases Air Pollution Controls
By J.R. Pegg
WASHINGTON, DC, November 22, 2002 (ENS) - The Bush administration has enacted changes to clean air rules that will allow power plants and refineries to avoid new pollution controls when they expand operations. The decision drew sharp criticism from Congressional leaders, state officials, environmental groups, public health organizations and the former head of the Environmental Protection Agency (EPA), who charge the administration has put industry interests ahead of public health and the environment.
Senator Joe Lieberman, a Democrat from Connecticut, criticized the Administration's "shameful record of abandoning environmental protection" and called on EPA Administrator Christie Whitman to resign in protest.
And then there is workplace safety, or the lack of it:
Bush administration rushes to change workplace toxic rules
http://www.jerebeasleyreport.com/2008/09/bush-administration-rushes-to-change-workplace-toxic-rules/
And:
Bush Forces a Shift In Regulatory Thrust
OSHA Made More Business-Friendly
By Amy Goldstein and Sarah Cohen
Washington Post Staff Writers
Sunday, August 15, 2004; Page A01
First of three articles
Tuberculosis had sneaked up again, reappearing with alarming frequency across the United States. The government began writing rules to protect 5 million people whose jobs put them in special danger. Hospitals and homeless shelters, prisons and drug treatment centers -- all would be required to test their employees for TB, hand out breathing masks and quarantine those with the disease. These steps, the Occupational Safety and Health Administration predicted, could prevent 25,000 infections a year and 135 deaths.
By the time President Bush moved into the White House, the tuberculosis rules, first envisioned in 1993, were nearly complete. But the new administration did nothing on the issue for the next three years.
Then, on the last day of 2003, in an action so obscure it was not mentioned in any major newspaper in the country, the administration canceled the rules. Voluntary measures, federal officials said, were effective enough to make regulation unnecessary.
The demise of the decade-old plan of defense against tuberculosis reflects the way OSHA has altered its regulatory mission to embrace a more business-friendly posture. In the past 3 1/2 years, OSHA, the branch of the Labor Department in charge of workers' well-being, has eliminated nearly five times as many pending standards as it has completed. It has not started any major new health or safety rules, setting Bush apart from the previous three presidents, including Ronald Reagan .
For details see: http://www.washingtonpost.com/wp-dyn/articles/A1315-2004Aug14.html
And then there are the regulations that require bidding on federal purchases, so that we taxpayers do not get the shaft.
Federal No-Bid Contracts On Rise
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/22/AR2007082200049.html
One paragraph from this article says: “A recent congressional report estimated that federal spending on contracts awarded without "full and open" competition has tripled, to $207 billion, since 2000, with a $60 billion increase last year alone.”
And the lack of regulation extends to government control of its own agencies, where officials are not permitted to accept bribes Etc. Or, at least they used not to be permitted to accept bribes, etc.
Sex, Drug Use and Graft Cited in Interior Department
By CHARLIE SAVAGE
New York Times
Published: September 10, 2008
WASHINGTON — As Congress prepares to debate expansion of drilling in taxpayer-owned coastal waters, the Interior Department agency that collects oil and gas royalties has been caught up in a wide-ranging ethics scandal — including allegations of financial self-dealing, accepting gifts from energy companies, cocaine use and sexual misconduct.
See:
http://www.nytimes.com/2008/09/11/washington/11royalty.html?_r=1&em&oref=slogin
Wonderful work, smrstrauss. I'm saving this.
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