Wrecking, Wrecking, Wrecked

The great fear that hung over the business community in the 1970s was death by regulation, and the great goal of the conservative movement, as it rose to triumph in the 1980s, was to remove that threat--to keep OSHA, the EPA, and the FTC from choking off entrepreneurship with their infernal meddling in the marketplace.

Defunding those agencies was one way to stop the killer bureaucrats; another was to stuff them full of business-friendly personnel who would go easy on regulated. The signature conservative regulatory idea became "voluntary enforcement", because everyone now knew that efficient markets regulated themselves. Bad practices or tainted products drove away consumers; therefore firms had an incentive to behave, an incentive far more powerful than some top-down scheme in which big brother told them what to do.

Whether people ever truly believed this nonsense or not, its application over the years makes up the basic story of conservative governance as I tell it in my book, The Wrecking Crew. This is the philosophy by which conservatives gutted the EPA and the Labor Department, turned over the Interior Department and the FDA to the industries they were supposed to regulate, let the CEO of Enron advise the vice president on energy policy, and generally came to regard business, not the public, as government's "customer" (a word that crops up with disturbing frequency in conservative regulatory history).

But it is only now, as we watch the financial system crumble around us, that we can really see the devastating consequences of this folly. It turns out the Securities and Exchange Commission (SEC), which was responsible for regulating investment banks, did a significant part of its job through a voluntary program which firms could participate in or not as they saw fit. As the New York Times told the story on Saturday, this system had--of course--been pushed for by the investment banks themselves, who wanted it in order to avoid the stricter rules from European governments that they would otherwise have had to obey.

And now, as a consequence, the SEC has almost no industry left to regulate. Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, Morgan Stanley: All of them are gone or restructured. At business's urging, business was left up to its own devices; its own devices turned out to be precisely the things that our grandparents set up regulatory agencies to guard against: euphoria that leads to panic; perverse incentives that lead to fraud; boom that leads to bust.

As you watch the world crumble, try taking your Armageddon with this sprinkling of irony: Over the last three decades, business has got virtually everything it wanted, and its doomsday scenario from the 1970s has come true because of it. The regulators have indeed killed the regulated--not by intrusive meddling but by doing nothing, by taking a nap while the financial sector puffed up the bubble and blew itself to pieces.

Comments

[racetoinfinity]

Excellent piece. You said it succicntly and well!

[RCS23]

100 % correct how the neo cons de regulated, got in bed with corporations ,wrecked the country, destroyed the middle class, yet still con voters to vote against their own self interest.
Now, after the Reagan trickle down theory has imploded, they want to privatize the profits and socialize the losses.

[PublicAdvocate]

Like Frankenstein's Monster, Capitalism must be strapped to the table with regulation in order to be managed. Once those straps fly loose, watch out!
American Capitalism tends to reward malevolent human behavior from exploitation of workers, ruination of the environment, to corrupting democracy through buying access for favors at public expense.
Looking at the European model of Socialism looks better and better as the mask comes off of Wall Streer and the hideous face of Capitalism is seen for what it is and what it does.

[exoevolution]

When the fox guards the hen house what "always" happens??

No chickens. No eggs. An empty hen house!

The Government is now asking the taxpayers to buy new chickens so we can have more egg$.

The problem is that the same foxes are going to implement the bailout!

[racom]

Today we must insist on comprehensive, proven, enforceable regulations before any other legislation. No money, no buyouts, no deals cut in the back rooms, nothing until after a signed bill that reinstates regulation.

[archtoplee]

Am I reading Mr. Frank's thesis correct that the financial meltdown is the result of a free market? The regulations and the bureaucracy had nothing to do with all of this meltdown drama that has been unfolding before our eyes? It may be true that certain administrations may ease off the regulatory whip from the backs of certain businesses, but not all of them. Cronyism I believe is what they call it when certain big wig busineses get special favors and politicians ease up on the enforcement mechanism. Politicans never follow through on agencies they promise to do away with when they are on the stump. Reagan is a prime example of that. He campaigned for abolishing the Dept. Of Energy, Education and OSHA. A free enterpriser before the election and a regulator after the election.
The definiton of Fascism is "government control of capital, ( factories, communications, transportation, etc), without direct ownership of the capital. A large factory or a small grocery store is capital because it is used as a means of production. Therefore a nation's wealth is determined by its productivity. If government, mother nature or criminal activity impairs a nation's means of acquiring wealth, those nations are poor. It wasn't regulations that created the capital in America it was the lack of it. There's one area that pro-regulators never mention when championing more regulation:Tthe Federal Reserve. Why not? and why nort audit it?

[RedneckDem]

Thankfully, your anti-regulation rant is falling on more and more deaf ears. Regulation is not a choice, it is a direct response to greed and avarice that hurts the country, PERIOD. They weren't thought up out of the blue to stifle business.

Kind of reminds me of the anti-EPA people. This regulatory agency was formed as a response to American companies knowingly poisoning their fellow citizens and the environment and then not doing anything (i.e. willingly) about it except try to cover it up.

[archtoplee]

Regulation by government , even EPA style regulation, is still government control without government ownership- that is a form of control practiced by Mussolini. America has a court system that Americans can use in dealing with polluters. America's system has the three brances of government listed in the Constitution. All of these branches have citizenship oversight. You favor a fourth branch-the regulatory branch - which has no oversight from the voters and citizens. The regulators aren't elected except at the state level and you want liberals and conservatives to just trust them. Billions of dollars to do what? Do something that local people can do on their own without creating an unneccessary fascist branch of government.

[TrustMeImASalesman]

Mr. Frank, this is a correct and amazing article.

I have a question: Is it possible that the American People, when we get ready to vote on election day, could appoint just one person?

And that Person will be Mr. Donald Trump. He will be employed for 4 years at a salary of 15 Billion dollars total. His job is to go to Wall Street and Congress and FIRE EVERYONE! Then he and his staff will re-hire individuals with common sense, drive, good sound financial reasoning, courage, a sense of right and wrong, moral courage to do the right thing.
Each person will get a maximum salary of $1,500,000.00. Expenses are fully paid with a budget for each position of $3,000,000.00.

Every hired person can be fired without notice and without reason! Based on production and profits generated for the American Treasury. No profit for America, no jobs for Americans....then YOU'RE FIRED!!! Don't let the door hit you in the ass on your way out. No parachutes, no extended salary severance packages.

I estimate America will save $550,000,000,000.00 Dollars.

Then again I may be wrong and it would be a bad idea.

[dshwa]

You plan just picked the wrong guy. You need Warren Buffet, not Trump.

[Indedave]

You're scarin' me here, folks. Bush II is as close to a dictator as I ever want to see in this country.

[ItHasToGetBetter]

I'm reading this book now. It's excellent and terrifying. I've never been angrier at my government more than in the last several years and it's nice to know that it hasn't been all my imagination-the lower wages for more work, the higher cost of living, high unemployment, threat of privatization of social security, the wealth disparity, the overblown salaries of CEOs that ruin the companies they work for while their employees burn in the wreckage, high insurance rates and less coverage. I only hope that the American people are smart enough to look at the ruin around them and realize what brought them here. If they're stupid enough to vote this same group of people back into power, then they have hit the "self-destruct" button. Though having also read "What's the Matter With Kansas?" (another excellent read),that's a frighteningly real possibility. Visions of plantations and 19th Dickensian London dancing in my head.

[dinnypat]

You're brainwashed. We are drifting towards Socialism and that is the reason for our ills: its not lower wages/higher work, it's higher productivity; a solution for rescuing Social Security,because every Congress since '64 has taken the 'surplus' of SS income over outlays and spent it; the wealth disparity is what gives incentive to exceed; high unemployment is due to protectionist policies and labor unions that propped up out of date jobs in a global market. Go to Russia if you want socialism.

[nikto]

Laissez-Faire should be deader than the Dodo.

Laissez-Faire economics has been discredited, disproven, revealed as a sham,
shown to have the opposite effect of its intention, etc etc etc

Only in a world that insists on thinking 2+2=66,
would Laissez-Faire economics be able to endure.

The Elite are just gonna' have to let it go.

[dinnypat]

You're out of touch. What you are looking at is creeping socialism and calling it Laissez-Faire. We don't have a hands-off government, we have a hands-on government, THAT is the problem.

[jotunloki]

Stop drinking the Repug Kool-aid.

[RedneckDem]

Don't even try to debate with kool-aid drinkers like this clown.

[archtoplee]

I think it was Thomas Jefferson who said that people that don't read newspapers are closer to the truth than those who do read them. He said that because many, but not all, of those who publish newspapers start them out not to enlighten anyone. They have an axe to grind , or are connected to some political Party and use this media to promote their man or their cause. The truth or enlightenment is the last thing on their mind.

The New York Tribune is an example of Horace Greeley's championing a new political party- the Republican Party. Greeley's managing editor was Charles Dana. Greeley and Dana were members of an organization that created about 50 communist communes in America. The group was known as The Association.One of those communes was in Ripon, Wisconsin where in a litttle school house they founded the Republican Party. Dana was a close personal acquaintance to Karl Marx, who was hired as a European correspondent for the Tribune. Those communes, or utopia failed for the same reason that the monopoply capitalists schemes failed- government regulation of the market using a dumb and discredited money system based on lies and printed on dollar bills to give pro-regulators and pro socialists a sense of protection- kinda' like a security blanket does to a child.

[luziannagirl]

Imagine a wrecking ball with "Republican" written on its side, bashing to bits a map of the continental U.S.A..

Caption: Republican Party America-Wrecking Service---We Wreck It All, 24-7

Plaster that on billboards in every major metro area for a Democratic landslide in November....if we can hang on long enough for there to be an election, that is.

[littleblackcat]

Puffed up the bubble and blew itself to pieces. How very well put.

[Krikkit]

Those who will not learn the lessons of history are doomed to repeat them. Every kindergardener should learn this mantra : "No regulation means boom and bust. No regulation means boom and bust. No regulation means boom and bust."

People living in the late 1800s knew about boom and bust. They saw it over and over again, and of course the biggest boom happened in the roaring 20s followed by the biggest bust, the Great Depression. Only sensical regulation stopped that endless cycle, and those that pushed and pushed and pushed to remove all "impediments to the free market" should NOT have napped during those history lessons.

[dinnypat]

Boom and bust is what keeps capitalists honest. What regulation does is prolong a situation so the boom and busts are wild swings and more devastating. You napped in economics class.

[RedneckDem]

It all depends on who taught you economics and how well you grasped a changing paradigm. Econ 101 is based upon certain tenets, as well as learning from mistakes, whereas your logic is based upon old and thoroughly debunked principles.

This entire fiasco will be traced back to its very roots, the 1999 repeal of the Glass-Stiegal Act. A regulation that served us well thru the growth spurt that created the middle class and an economy unmatched in the world. An economy not only based upon the sale of goods, but the manufacturing of goods.

I have no problem calling people like you traitors to your country and your fellow citizens...

[KHAAANNN]

De-Regulation ONLY works in a situation with NO MONOPOLIES!
The last three Republican administrations never met a monopoly they didn't like.
They did not prosecute ONE SINGLE anti-trust action.
We now only have 4 Oil companies (down from 12), we only have 4 Media companies (down from 14), we only have 3 Communication companies (down from 8).
They collude, we all lose. When Government and Corporations collude to monopolize markets, that is called FASCISM.
We need MASSIVE anit-trust action to break up the monopolies and vigorous regulation of the size and reach of the larger companies to insure they do not become monopolists.
Teddy Roosevelt knew this and he broke up the TRUSTS.
FDR knew this and broke up the Financial houses.
The Glass-Steagall act was created for a REASON.
The Sherman Anti-Trust act was created for a REASON.
Reinstate BOTH acts fully and USE THEM.
Then, when a company is mis-managed, we LET IT DIE and the remaining players re-adjust. Entrepreneurs have a chance, and competition works.
With Monopolies, NONE of this happens and companies become "Too big to fail".
Any businessman with half a brain knows that you NEVER let one customer have more than 30% of your business or they can DICTATE terms to you (like in the bailout.)
De-regulation without Anti-Trust protection AND high Tariffs is insanity.

[archtoplee]

George Santayana and other historians were certainly correct in that assessment- http://www.quotationspage.com/quote/2042.html
It is apparent that two people reading the same exact period in history are going to arrive at different conclusions. Insofar as the good of government regulations goes an honest and fair approach is required to see how good those regulations have been using history as a guide.

1941, Fed Chairman Mariner Eccles told a House Committee that the Fed had "created" billions to get the nation out of the Great Depression.

In 1968, House Banking Committee Chairman Wright Patman tried to tell the nation: "In the United States today, we have in effect two governments.... We have the duly constituted government.... Then we have an independent, uncontrolled and uncoordinated government in the Federal Reserve."

In January 1993, a National Geographic article quoted a Fed official as he matter-of-factly noted that his employer had just "created" $100 million to purchase Treasury bonds. He added: "It's money that didn't exist before."

The Fed can purchase U.S. Treasury bonds and earn interest on them. It can then use its vast holdings to prop up whatever it wishes, or create new money. New York University Professor Nouriel Roubini summarized that the current bailouts amount to "privatizing the gains and profits ... for Wall Street and the rich" while placing the burden on the people.

[krocklin]

Bush, the Heritage Foundation, Gingrich, Limbaugh, Cheney, Grover Norquist and the rest of the cabal achieved what they wanted - or perhaps they were overachievers.

[rockledge1900]

This entire situation is a result of the government instructing, encouraging and quite often forcing private lending institutions to grant high risk loans to low income individuals. I am trying to figure out how that is the failure of capitalism. The legislature had its big hand so far up the lending industry's arse that it looked like a sick puppet. Ultimately this is a failure of poor legislation that began decades ago. And when the crap storm finally hit the Dems fell back on their ol' reliables.... big business and the Republicans are to blame. I was brought up to believe that you should be able to put 20% down for a home loan, that you don't buy a home that you can't afford, that you wait until you are financially capable of living up to the loan agreement. If you can't afford a house then you live in an apartment, a trailer, a tent for goodness sake. When did home ownership become a God given right?

[littleblackcat]

The entire situation is the fault of deregulation. Those with the most are not satisfied until they have ever more and more. The capitalistic pyramid collapses on itself when the topmost one per cent owns more than the lowermost ninety-nine. This was the lesson in economics class in 1942. It is as timely now as it was then.

[herbie36]

Home ownership became a God-given right when Bush numero dos announced the great "Homeowner Society"of the 21st century.

Also, deregulation led to this crisis, then kept making it worse. Clinton did some of it on the way out, but there were 8 years to correct this. . . instead they continued deregulation by allowing banks to sell off loans that banks knew were no good even before they made them. And then those lenders could sell them off to others. Then you could invest in them. Everyone,on both sides of the aisle, knew this was coming.

[dinnypat]

Rockledge is right, and you haven't gone back far enough to find the root problem, which is the Community Reinvestment Act of 1977, the Fannie and Freddie backing of those bad loans so banks would make them when they wouldn't normally. You have Greenspan pushing them as an expansion tool, and Rep Frank with his head in the sand.

But the crisis were are in is due to a Sarbanes Oxley accounting regulation that forces firms to artificially undervalue assets in a downturn, which we are in. So the mortgages are frozen because the holders know their value is higher than what is on paper.

[dshwa]

Your repeating talking points not actually based on facts. The vast majority of bad mortgages were made by Brokerage firms, who were not covered by the legislation mandating loans to low income families. You complain that the dems are falling back on their old reliables but you're doing what the repubs have done for years and falling back on their old reliable: blaming the poor.

[RedneckDem]

You're going to the end result of the meltdown, as opposed to the de-regulation that occured that started the entire process. Basically, you just diagnosed a symptom and never touched the disease.

[magen]

Hopefully, this will mark the beginning of the end of the economic philosophy of---

It's all good as long as the bottom line is in the black, no matter who gets effed.

[wingnutslayer]

As George W. once so cavalierly put it "History? We'll all be dead by then." What did you mean by "we" oh worthless one.

[pup sydney]

In my opinion the cold war is finally over today. The communist system failed first, the unfettered neo-fascism of the neocons failed today.
The Americans are sadly unprepared uncultured and unaware of alternative social systems. Very few know what a real western social-democracy is and can do for this nation to accept anyhthing but capitalism of the worst type (the USA type).
The majority will be stuck on "uninformed and willfully stupid" after this crisis as we have been since the beginning. We will keep on going from Boom to Bust as if it were an anavoidable "course". We never do learn from our repeated mistakes and this time is no different.
The democrats are not proposing anyhting radically new, they are accepting a neofascist capitalism just with Valium added: what change is that? Is just a postponement until the next greedy bastards retake hold and restart the cycle. Pessimist? You bet.

[newshawk14]

Everyone should remember a quote by Herbert Hoover of all people, "The only thing wrong
with capitalism, is that capitalists are so greedy." We've just seen it play out in spades. We
definitely need government regulation and a bit of socialism here and there, rather than
hand out monopoly power.

[darker]

Yes, you are correct.
One way street capitalism isn't the only way.
We must enact REGULATION to have some sanity in the runaway profiteering and corruption.

Republicans are NOT STATESMEN.
Republicans are CORRUPT FRAT BRATS who specialize in dividing, not uniting with
anybody on anything! Republicans CANNOT GOVERN.

MCCain is leader of THE GOP GREEDY BUNCH OF OBSCENE republican GAMBLERS
that crashed the Economy of America.

NO MORE YEARS for corrupt Republican who act out like SPOILED FRAT-BRATS.
Enough is enough.

Republicans proved they can't govern and don't want to! they lie, cheat, steal, divide, war monger.
NO MORE YEARS TO REPUBLICAN LIARS.