One Lesson from the 1930s: Financial Regulation Has to Be Bold

Three weeks ago I asked why so many Republicans seem to hate America. Well, today, one reason has become clear: Because some of them love banks and big corporations more than they love the American people or the American economy.

President Obama revealed his plans to regulate the financial industry today, and I thought House Minority Leader John Boehner's response was telling. He said:

"I think it's just going to be too big of a foot on an industry that already is having financial problems."

I completely understand that differing views and philosophies on government is actually a positive thing, and I certainly don't think the Democrats have a monopoly on good ideas. But the Republicans have abdicated their position as a contributor to the national conversation, having become a negative force on political discourse in that they no longer even pretend to advance ideas that are good for the country. Instead, they use deception, fear and intimidation to try and trick and scare people into supporting policies that will benefit the party's narrow constituency, including corporations and financial institutions.

Boehner's quote shows that he isn't even trying to pretend. He is there to protect the banks. Last year, the financial system nearly came crashing down, in large part because the regulatory system set up after the Great Depression had been systematically dismantled in the previous 28 years. As much as the financial industry likes to advance the myth that last year's financial crisis was a once-in-a-lifetime, who-could-have-seen-it-coming event, most economists agree that the crash was the result of human error, with finance professionals taking too many chances thanks to a compensation system that rewarded deals regardless of future consequences. (The New York Times reviewed two books yesterday, Daniel Gross's Dumb Money and Gillian Tett's Fools Gold, which demonstrate this idea from different perspectives.)

Certainly, the destruction of the post-Depression regulatory structure created an environment that allowed the events of last year to come to a head (especially the 1999 Gramm-Leach-Bliley Act, which repealed the provision of the Glass-Steagall Act of 1933 that essentially prevented banks from taking on so much risk by separating commercial banks and investment banks).

After the financial system nearly collapsed and slipped into crisis, and after the banks needed billions of dollars in bailouts, Boehner has the nerve to tell the American people that he is worried about too much regulation? Not to mention his line about "an industry that already is having financial problems." How the hell does he think the financial sector got into its current mess? It was self-inflicted, and largely a result of a lack of regulation. Seriously, Boehner's argument seems to be that due to a lack of regulation, the banks made horrendous decisions that put them in bad financial shape, so to help them, we should not regulate them. This is the current state of Republican thinking: circular logic that makes no sense.

A lot of writers draw parallels between how both Franklin Roosevelt and Barack Obama won the presidency and had to deal with a financial crisis left to them by historically bad Republican incumbents (Paul Krugman used 1930s examples in his latest column to make his argument that the Obama administration has to continue its current economic policies and not worry about inflation). While I'm sure from a policy standpoint, a lot can be learned from what Roosevelt did and didn't do, the situations are not identical, so I understand that everything that worked (and didn't work) then may not have the same results now.

But one thing that can be learned and applied directly from the 1930s is the politics behind the crisis. The stock market crashed in 1929, but Hoover took no effective action to stop the ensuing economic and financial collapses. Roosevelt was sworn in in March 1933, and by the end of the year, both the Glass-Steagall Act of 1933 and the Securities Act of 1933 were passed to address the crash and the depression. The Securities Exchange Act of 1934 followed, and, along with the Investment Company Act of 1940 and the Investment Advisers Act of 1940, the laws created a regulatory framework that successfully held off abuses and boom-and-bust financial cycles until the savings and loan crisis popped up in the 1980s (after deregulation had begun).

I'm sure the Boehner equivalent of the mid-1930s was aghast at the new regulations, but that didn't stop the bold legislation from being passed and signed in a matter of months. There was a crisis, and everyone knew where it had come from, so solutions were proposed and enacted to try to ensure that a similar crash could not occur in the future.

We find ourselves in a similar situation in 2009, but the reaction isn't quite the same. We know that the dismantling of the regulatory infrastructure enabled last year's financial crisis, and yet from listening to the Republicans, it's almost like it never happened. Now, the president releases proposed regulations that are heavily watered down when compared to what was adopted in 1933 and 1934, and what many were proposing for 2009, and even the compromise proposal is batted away by Boehner.

President Obama even admitted that his proposal is not as strong as he would like. A New York Times article today describes the the plan as "the product of weeks of meetings among government officials, financial experts, lawmakers, industry executives and lobbyists, many of whom were invited to help the White House draft the proposal." And the president is quoted as saying:

"We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don't want to tilt at windmills."

The article notes that on certain issues, mutual funds, hedge funds and dealers in derivatives were able to score partial or total victories.

Normally I am a strong supporter of politicians who deal in the real world, and I know that Obama is correct that if his plan doesn't pass muster with members of Congress, nothing will get done. So I realize that the blame lies more at the foot of Congress (especially centrist Democrats afraid of being branded as over-regulating liberals) than with the president. But putting blame aside, I am frustrated that the response to the crisis seems to indicate that we have forgotten the lessons of the 1930s. Everyone in Washington should be bolder, taking the same kind of decisive action that their predecessors did during the Great Depression. After all, the regulatory framework they constructed did an outstanding job, holding off crises until after it was torn down.

That is why I am so dismissive of Boehner's logic-challenged, ideology-driven, useless comment on regulation. And why I hope he is absolutely ignored. If the new plan is too tepid and doesn't impose real changes to the regulatory system, we will still be vulnerable to another financial collapse fueled by greed, and we will be faced with more bailouts of too-big-to-fail institutions.

It's time for everyone in Washington -- Democrats and Republicans -- to look at the example of the quick action on legislation in 1933 and move on a real regulatory overhaul in the coming months. Nobody should be handing the banks that caused last year's meltdown what they want. Contrary to what Boehner says, a big foot needs to be placed on the financial industry, to make sure that last year's near collapse can never happen again.

Comments

[GrainOSand]

Action for the sake of acting is no action at all.

[JerryLevy]

A film maker and writer may be the last place we want to go for financial advice. When the stock market crashed in 1929 we followed up with increased taxes and limits on global trade. We got the great depression in return. We need to look at the role government played in this, especially the pressure put on Fannie Mae to extend loans to people who could not afford to pay them back.

[GrainOSand]

Let us also thoroughly scrutinize the pressure greed put on individuals to write loans they knew full well could not be paid back. If I let a child play with matches, is it the child's fault the house burned down or is it my fault, the supplier of matches, the fanner of flames? The child was enchanted by fire (the idea of a nice place to stay even though the offered terms were unsustainable and in cases unreadable due to the fineness of the print). The loan originator too was enchanted -- by greed.

I say no taxes, no government services, no government concern for people dying in the streets due to untreated medical problems because of no healthcare, or due to homelessness and starvation because of joblessness, or due to the roving bands of uneducated youth with nothing but time and guns on or in their hands respectively. Let us have a true dog-eat-dog environment. Let the free market rule. I say we bring the concept of discovery back and the concept of missionary work begetting theft of land, property, and life. I will go plant my flag on some bank and call it my discovery. We need a GOP agenda for sure. I cannot wait for “everyone for his or herself-ocracy”. We will truly find out who is a sheep and who is a wolf. That is when we will separate the hyenas from the antelope.

http://www.costasmandylor.us/images/hyenas.jpg

[Retrofuturistic]

Boehner is in the pockets of the people who don't want to be regulated. It's that simple.

It is a failure of Obama's that many of the people who caused the problem were "...invite­d to help the White House draft the proposal."

Obama needs to stop collaborating with the enemy and do the job that the American people elected him to do.

[themodernleader]

Maddie0001. Citizens know what Obama should have done. When only brilliant officers can grasp and address the problems, we have entered the realm of meritorus autocracy.
What Obama should have done. Allow the banks to collapse. Then identity the solvent banks and transfer accounts, pension funds and other accounts of the innocent. Order in importance debt that may be salvaged. Pick up the pieces from the broken banks. Temporarily, the Government is the bank. Outlaw highly leveraged schemes that are not backed by personal fortunes that are liquid. Bring back strict regulation. Break up monopoly in commerce, except for natural monopolies that must be nationalized or highly regulated on the basis of national short and long range goals.
Start public works programs employing millions of unemployed. Order 30 billion dollars of passenger railroad cars for vacant auto plantsfor a nationalized rail passenger system. Nationalize the airlines and create a rational passenger service for cities of all sizes. Nationalize portions of the energy complex, develop a rational energy policy and procedure. Nuclear power plants be built with 60 billion + appropriated for new power plants. Develop a crash program for clean coal plants.
All material and equipment for the various programs must be purchased from American domestic sources .
Elliminate the welfare system, substituted with mangingful jobs. All citizens must pay taxes and fees for a national health plan. Search the world for new technologies to address our employment, health and environmental needs.
A good start.

[Overd0g2]

The financial system is already the heaviest regulated system in the country. The "regulators", of course, are appointed politically, and therefore not trustworthy. No matter how many regulations you put in place, certain ones will be ignored to provide goodies to the politically favored.

[RoloTomassi]

More apologist blather; the problem is exactly the opposite of what you claim. The regulators under conseravtives have been the most untrustworthy ever, and that is because conservatives insist on appointing industry insiders sympathetic to industry rule avoidance, and then they are additionally told not to regulate because such is an unnecessary imposition.

Spin all you like; it will not change the facts and will not cause the majority to forget recent history.

[realpolitic]

Boehner says, "I think it's just going to be too big of a foot on an industry that already is having financial problems." Conservatives are just mailing it in these days. Even Alan Greenspan
and Republican former SEC Chairman Christopher Cox admitted it. It was the change in SEC regulations allowing investment banks to increase leverage ratios to as much as 40 to 1 that got us in this trouble, as well as when former Senator Phil Gramm slipped language into a law that said derivatives would go unregulated. Conservatives here, as with climate change and almost all matters, have their collective heads in the sand!

[ntmessage]

Regulation needs to be smart and principles based. Bold or not bold.

[LeonBNJ]

It is interesting to note that FDR came from a very rich family that made much of it's wealth on investments and probably lost a lot of it in the stock market crash that led to the Great Depression. To me the rich have a defenite self-interest in sound and sufficient regulation so they don't lose thier wealth but not have too much regulation that eliminates all risk and no investment. Appealing to the self-interest of the investing class is the best way to sell a return to a sane regulatory structure.

[themodernleader]

FDR realized that the dollar must not be damaged through fiat money. He also realized that it was impossible to bail out the banks without degrading or destroying the currency. Thus, he created a bank holiday and pulled the charters of the insolvent (bankrupt) banks and guaranteed the deposit accounts of the solvent banks. Meanwhile he created millions of government jobs to rebuild our country with millions of the unemployed. FDR had the best subordinates available in the country and world.
Obama has been told by his incompetent subordinates and advisors that the banks must be saved at all costs. Thus, he has spent or obligated over 13 trillion dollars to back bad (toxic assets) loans. But there are trillions of interest rate derivatives ready to come due when interest rates carreen out of control. There is no way that the government can bail out trillions without destroying our currency. {This calumny would cause the fall of the United states government­.} What about the 16-18 millions unemployed. In Obama-land they don't necessarily exist. There are no plans. Let the poor suckers feed on hope.
Our government projects reckless finance and broken politics to prop up a global crisis of failed American capitalism to paraphrase the patriot, Kevin Phillips in his most recent book "Bad Money". We are going down a slippery slope of destruction and ruin on the comforting words of promise and hope for a greater tomorrow. Thank you, Barrack Hoover Obama.

[maddie0001]

And what he should have done is........­..........­??

[juggernaut1729]

Regulation is not going to change anything.

Fannie Mae and Freddie Mac were among the most intensely regulated companies in the country.

There was a Government organization(still is I guess) called the Office of Federal Housing Enterprise Oversight whose sole job was to regulated Fannie and Freddie. They had about 200 employees.

So, we had 200 people just making sure that Fannie and Freddie were not misbehaving. What happened ? They completely FAILED in their job.

This is how the current adventure is also going to end up.... and it is not at all because the regulators are corrupt. Of course, regulators ... who after all are nothing more than underpaid bureaucrat­s.... can be corrupted, but even if they can't, they are bound to fail in their job.

Latter day financial instruments tend to be very complex and have dozens ... sometimes hundreds of counterparties. It is impossible for even financial wizards to gauge their value accurately. So, bureaucrats don't have a snowball's chance in hell.

To make things worse, a typical large financial organization is a counterparty to tens of thousands of these derivatives. The regulators have an impossible job.

The only sure way of preventing a relapse of this crisis is to ban most of these complex financial instruments, but that is not going to happen !

[RoloTomassi]

Regulation only works if the regulators do their jobs; and while blame for that is shared, the lion's portion goes to conservatives who consistently insist that the regulators they appoint NOT do their job.

[juggernaut1729]

In this case, regulation won't work even if you have superman as a regulator. You put in the 100 smartest and most dedicated people into this and they will fail too. Without banning complex derivatives, regulation is a useless exercise.

[Clownbaby]

The REAL lesson from the 1930's: the Federal Reserve and gov't action creates bubbles and boom-bust cycles. Is it any wonder that we went through the worst economic downturn in America's history (up to this one, we don't know how it will end yet) a mere 16 years after the 1913 Federal Reserve Act?

Remember the Panic of 1921? Probably not, because the gov't and Fed decided not to intervene. When massive gov't intervention and action by the Fed takes place, you get the Great Depression. Coincidence?

[kylie]

Remember the "Great Depression" that resulted from No Regulation and a President that did not have a clue!
Roosevelt saved the country--my grandparents and their friends who were Republicans remember it well!
Stop giving WallStreet free reign to destroy our economy as they and the Republican Party did, almost twice.
Your argument just doesn't sell, "Baby".

[Clownbaby]

Hoover didn't have a clue because he was a protectionist (i.e. regulation!). Roosevelt didn't save the country by any stretch of the imagination, he only made the Depression worse by reallocating resources from private to public make work jobs, and taking away economic freedoms with protectionist policies and price controls. He's also the one to thank for our wonderful SS system, which is an abysmal failure and a money pit.

[FormerReaganite]

Excuse me, the Federal Reserve was created to smooth out "boom and bust" cycles. Study further back into the history of monetary policy, before the Federal Reserve Act (There was no monetary policy)

[Clownbaby]

The Fed WAS created basically to end economic instability. But all we've gotten is even worse economic instability because the Fed, not the market, sets the interest rates and controls monetary policy. We've had the Depression, stagflation, and now this wonderful little recession/­depression all on account of the Fed's actions.

[FormerReaganite]

The depression was caused by a single factor: THE GOLD STANDARD. The abandonment of this fiasco was the best thing that happened to the world economy.

[Clownbaby]

Yeah, what's wrong with fiat currency anyway? Why would anyone want money to be worth something beyond a gov't's say so?

[maddie0001]

Booms and busts are part of capitalism. Remember tulip mania (1637), South Sea Company (1711)?

[Clownbaby]

Yes, but they are much longer and much more severe thanks to the private central bank, the Federal Reserve. The folks who brought you the Depression, stagflation, the dot-com and housing bubbles, and now this recession/­depression­.

[joebhed]

It's the debt-money system that creates the boom-bust cycles, Federal Reserve or no federal reserve.
Yes, the Fed's fractional-reserve banking system runs on debt-money - where ALL money is created as a debt, and LOANED into existence, at interest, but the money to pay the interest is never created.

The 10-to-1 expansion works great on the run up(BOOM!), but when every dollar you take out on the way down causes ten dollars to come back in, .....BUST !

read : "How Debt Money Goes Broke".
http://www.financialsense.com/fsu/editorials/2005/1212b.html

We are *here*.

[Uselessboy]

You don't understand the project.

The project is to AVOID saddling the economy with New Deal sanity this time around.

[panamajohnny]

My hope for Obama to be a great president is thwarted by his failure to pick good advisers. Geithner, Summers, et al, are favoring the financial sector at the expense of taxpayers.
Meanwhile nobody's addressing a fundamental flaw in our system--corporate governance. Whether banks, manufacturers, mutual funds, or universities, we're allowing their presidents and CEOs to pick country-club buddies to be the trustees and/or directors who are supposed to monitor them and fire them when they screw up. Until Congress, investors, stockholders, and donors do something to fix this, we'll have a corrupt system that is unable to discipline those who run things.

[zitlight73]

Expecting the administration to reign in the banking industry is similiar to have expected the Bush administration to reign in Big Oil and strengthen the EPA. Presidents dance with the ones that bought them.

[FormerReaganite]

On regulation:

Why not go under your car hood and start pulling out wires and hoses. Now, try to start the thing up. Certainly the engine will run better than it did before!

Most Republicans live in a fantasy world: Deregulate everything, and the economy will prosper. Cut taxes and the revenues will rise. I hope they can find a ride home.