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

[fuel4thefire]

CDS Market: http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080914/REG/809129960

[fuel4thefire]

Because there will always be thieves, we have laws that punish thievery. The notion that deregulation could ever work in our financial markets is ludicrous & against the history of human frailties, those being greed and avarice.Op­portunisti­c people always use the system in place to line their pockets. These types do not care about the laws, ethics, or loyalty. Their narcissism will know no bounds as to their feelings of entitlement and unless held accountable will move onto the next game in town. Regulation is imperative to a healthy financial system.

[fuel4thefire]

Source: Financial Week 9/14/2008 The credit default swap industry may face its biggest hurdle ever in coming weeks as it settles contracts covering Fannie Mae and Freddie Mac’s $1.4 trillion in outstanding debt.....The government takeover of the mortgage giants triggered what will be the largest—and possibly most complicated—CDS settlement in history, industry experts say. And while the losses expected on credit derivatives sold against Fannie and Freddie might seem small—averaging perhaps no more than 2 cents on the dollar—thanks to the Treasury bailout, some experts say that could be enough to wipe out hedge funds and other sellers that have little or no cash on hand.
The credit derivatives market, which has ballooned to $62 trillion in the last ten years or so, only set up a formal procedure to settle swaps in 2005, following the bankruptcy of Delphi, which had fewer bonds outstanding than the number of CDS contracts written on the company. That sent CDS buyers scrambling to purchase the company’s bonds, which they needed to settle their derivatives contracts.
The International Swaps and Derivatives Association, an industry trade group, responded to that chaos by establishing settlement protocols, in which the cash value of a defaulted bond is determined via auction.

[TankerRat]

I can still see Ross Perot telling us this was going to happen. People called him a lunatic. Now people are putting their faith in the SAME BOZO'S be they Republican or Democrat to "lead" them out of the mess they ( politicians) were so involved in creating. Good luck suckers!!!!!! You are going to NEED it!!!!!!!! The train wreck is nearly upon us.

If not us-WHO? If not now- WHEN?????????

Draft Perot/Ventura-08

[BoshSpong]

This market meltdown is a direct mirror image of the failure of communism. After the demise of that system, caused by it’s denial of basic human nature; the fact that people want to get ahead and that they will not perform without due reward. Now we have living proof of the demise of the raw capitalist system, a system that also fails to take human nature into consideration; without regulation people will continue to pursue ever higher profits regardless of consequences.
Of course we have the diehards on both sides, ideologues who do not want to be confused with the facts because their minds are made up. Even now the right wing talk shows are full of incredible propaganda blaming the meltdown on civil rights legislation and regulatory agencies.
All that being said, this is still a great victory for the extreme right – Their strategy to leave the Nation so deeply indebted so as to preclude the creation or maintenance of social programs brought us the Reagan deficits, now it appears that Bush & Co. have seemingly closed the deal, they won this round no matter how we slice it.

[brizzle]

Our economy can not be called a "Raw capitalist system". Our government gives tax breaks, incentives and straight-up handouts to many oil, automotive and airline companies, just to name a few. This is not capitalism, this is socialism...

To claim that our current economic problems are the fault of a real capitalist system is just wrong. This is not capitalism...this is socialism.

Even before the bailout...

[DrPaulProteus]

Call it what you want then, but the larger point is that those running it swept away the rules and safeguards that make it work. In doing so, they who run it got to run it how they wanted it, and now they've screwed it up badly.

[HyperInfluential]

But that's the point: when you leave it up to the gamblers to decide how much credit they can extend themselves, they always choose more! And if they win big, they buy influence to deregulate their casino even more. Everything works fine until a gamble fails.

[virto]

This is what you get when Corporate America hoodwinks consumers into voting against their interests. For years, the Chamber of Commerce has been pushing tort "reform" as a means to put a stop to rampant lawsuit abuse -- which was a myth. In actuality, the percentage of lawsuits by individuals has actually gone down over the years, and it's corporations suing one another that file suits that clog the system.

Along the way, the Chamber and its cohorts blocked lawsuits brought by people who were defrauded, injured, or killed by regulated industries by arguing that litigation might interfere with the agencies' efforts to regulate -- even though those agencies had already been hollowed out, deliberately deprived of the funds they needed to do their job, and were run by the heads of the industries they were supposed to be regulating.

It's a wonderful thing if you're a corporation. Not so much if you're an individual consumer who doesn't like being lied to about the terms of their mortgage, don't like eating food that poisons them, and don't like their children playing with toys that can kill them.

And as a lawyer who deals with these issues on a regular basis, I have first-hand knowledge of one of the more ironic aspects of all this: Conservatives come out, guns blazing when they're the victims -- and they scream the loudest when they discover they've got nothing but blanks in their pistols, thanks to the right-wingers they've supported all their lives.

[thegirlnextdoor]

Greed. It's really all about greed. And, it looks like the greedy ones who built this finanacial house of cards are actually still going to win with a bail out that saves their jobs and their money.
Meanwhile down on the farm - simple folks who have to balance their cheque books are going to loose their homes.
It makes me sick.

[fuel4thefire]

Go here to understand the greed and how deep and pervasive the problem is: http://www.npr.org/templates/story/story.php?storyId=94928783

[hangdogit]

The sequence of events.

1. Unregulated 1920's Wall Street leads to greed-based house of cards and stock market collapse in 1929.
2. FDR elected in 1932 -- regulates business. Works well until:
3. In 1980 Reagan says "government is not the solution; government is the problem." Deregulation mind-set takes hold. Americans forget/ignore history. Seems to work OK until:
4. Unregulated 2000's Wall Street leads to greed-based house of cards and need for massive taxpayer bailout in 2008.

Likely next steps:
5. Bailout passes along with re-regulation. Would have been better to skip steps 3 and 4 (and 5).

The irony is that those low-information "Reagan Democrats" and blue-collar whites can now pay the bill for their folly and short-sightedness. Congratulations: voting against abortion, equal rights, secularism, social justice, gay rights and so on is now costing you -- and all of us.

The one good thing to come out of this scenario is that the Reagan coalition is dissolving as the middle class realizes how they are being shafted for past votes. People today have the opportunity to avoid re-repeating the mistakes of the past by supporting Obama/Biden and opposing the anti-regulation McCain.

[fuel4thefire]

The Reagan revolution results are the current crisis we are experiencing. Read my other comments for more information and this: http://www.npr.org/templates/story/story.php?storyId=94928783

[fuel4thefire]

Read about his part in the unregulated $62 trillion CDS market: Gramm's 262-page amendment, dubbed "The Commodity Futures Modernization Act," according to Texas Observer, freed financial institutions from oversight of their CDS transactions. "Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of [CDSs]-which in theory insure the banks against bad debts-those risks are passed along to insurance companies and other investors," wrote Texas Observer. The question is, Where IS the $62 trillion CDS dollars to back up the mortgage market????? THAT is the story, the crime of the this century, and the rea culprit in this debacle.

[tombaker]

Anyone who argues that any game can proceed properly with no officiation is likely dead wrong or lying through their teeth (and probably both).

Come on Friedmanites - give us some empirically verifiable examples. I dare you.

[tombaker]

Well? Come on free market mouseketeers. Got anything besides lip service??????

[DrPaulProteus]

...crickets...

[autrykid]

I remember well the arguments made for deregulation. All those neo economists from Harvard, etc, extolling the virtures of free enterprise and self regulation. There were many who oppsed that philosophy because there was too much opportunity for greed, and a lack of self discipline by markets.
Now you see what happens when you put the fox in charge of the chicken house.
Us tax payers have to buy a whole lot new chickens.

[Wichitan]

Don't bother! They have foreclosed on the chicken house.

[CactusTom]

What average folks still don’t get is how it was that McCain and his lobbyist buddies were spearheading this train wreck. In deed, a clear understanding of the sabotaging of the regulatory process would have McCain zero in the poles. Come on, Obama, paint an effective SOUND BITE picture of McCain & Company wrecking the economy. Please!

[certainot]

right now limbaugh is laying out the case that dems are solely to blame for this mess, resisted efforts by republicans to reign in fanny and freddy, that they did all this by design, and are now in the proocess of ripping off America. suspect soon hannity and all other GOP radio blowhards and then the usual GOP media operatives will be on board. he is chiding mccain for not being forcefull enough blaming dems and it may be the GOP is manufacturing cover for their reps to reneg on voting for the bailout.

white guilt, socialism, acorn, obama's advisor rains (not) who will soon be in his cabinet, etc are to blame. this is a full attack to 60 MIL that will make it very difficult for obama to contradict. if obama does not immediately respond to this in radio ads, etc, or if obama supporters do not call or picket their local talk stations for spreading the lies it will soon become truth.

[MThomasNC]

Mr. Frank. Your analysis is spot on - I would go back to the 1920's when the republicans tried this scheme, and the markets crashed. They never agreed w the new deal programs that saved this country and their butts. Since the 1930s they've tried to undermine the system and deregulate the markets again but never had tenough votes. Then Pres Johnson signed the civil rights and great society programs which pissed off a big segment of the population. The money managers used those two events to create backlash, and subsequently a political movement using wedge issues to get votes and gain control. They succeeded big time from 1970s thru 2006. All of the new deal programs got overturned over this 36 year span except social security, which Bush wanted to privatize in 2005. When they could not get their hands on the social security windfall, their house of cards folded.
One good thing about this bailout - the fox will not be watching the hen house for a very long, long time, and the particular conservative idealogy is dead.

[Parker]

I started reading the The Wrecking Crew 2 weeks ago today. It was extremely weird. I felt like I was reading a book about "how we got here", not one that was written well before the meltdown.