President Obama's Executive Order on regulatory review was originally set in motion by his February 3, 2009 direction to OMB to create an improved regulatory review process.
The fundamental principles and structures governing contemporary regulatory review were set out in Executive Order 12866 of September 30, 1993. A great deal has been learned since that time. Far more is now known about regulation -- not only about when it is justified, but also about what works and what does not. Far more is also known about the uses of a variety of regulatory tools such as warnings, disclosure requirements, public education, and economic incentives. Years of experience have also provided lessons about how to improve the process of regulatory review. In this time of fundamental transformation, that process--and the principles governing regulation in general -- should be revisited.
September 30, 1993 is an interesting date. I was the deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement (NCFIRRE). We issued our report in July 1993 on the causes of the S&L debacle. Our report was based on an extensive investigation of what worked and what failed in regulation.
In particular, we found that the deregulation and desupervision created an environment in which at "the typical large failure" "fraud" was "invariably present." By fall 1993, the Office of Thrift Supervision had learned the lessons and developed extremely effective rules, supervision, enforcement, and support for the criminal justice system. Congress passed the Prompt Corrective Action (PCA) law in 1991. The regulators had removed the abusive regulatory accounting rules designed to cover up the scale of the debacle. Administration officials had falsely used this cover up of losses through accounting gimmickry to claim that the S&L crisis had been "resolved" at no cost to the taxpayers. The PCA was based on the finding that such accounting cover ups and "forbearance" greatly increased the eventual cost to the taxpayers.
By fall 1993, a well-functioning partnership of the OTS and the Justice Department had produced over 1,000 felony convictions of "major" S&L frauds -- it remains to this day the greatest success against elite criminals in history. The Justice Department and the OTS ensured that the prosecutions were prioritized properly by creating the "Top 100" list. The OTS (which was created in 1989) had brought over 1,000 serious enforcement actions. The OTS secured over $1 billion in settlements from top tier auditors and brought hundreds of successful civil actions against the elite frauds. The reregulatory effort was so successful that for the next 15 years every U.S. Treasury Secretary flew to Tokyo and urged Japan's leaders to stop relying on dishonest accounting to cover up their main banks' losses and to instead adopt the regulatory policies that prevented the S&L debacle from becoming a catastrophe.
By September 1993, the S&L regulators had written extensively of our research findings about the role of accounting control fraud in driving the crisis and the regulatory and accounting lessons we had learned. My papers, collectively roughly 500 pages, had been circulated among many finance economists. Our work explained why econometric studies produced exceptionally erroneous findings in the presence of accounting control fraud and financial bubbles. Three of the nation's leading white-collar criminologists, Henry Pontell, Kitty Calavita, and Robert Tillman had published several journal articles on these same topics. George Akerlof and Paul Romer formally presented their paper on accounting control fraud -- "Looting: the Economic Underworld of Bankruptcy for Profit" at the Brookings Conference on September 9, 1993 before many of the nation's most prominent finance specialists.
The NCFIRRE report notes that key elements of the Reagan administration -- particularly Treasury and OMB, actively opposed our vital reregulation of the S&L industry. That reregulation was essential to containing a raging epidemic of accounting control fraud in the mid-1980s. Only the fact that the Federal Home Loan Bank Board was an independent regulatory agency prevented OMB from blocking S&L reregulation.
President Obama is correct that white-collar criminologists and a few non-theoclassical economists have continued to add to the useful understanding of regulation since 1993. However, his 2009 direction to OMB is not candid. By September 1993, we not only knew how to regulate effectively -- financial regulation was exceptionally effective -- and employment and growth were surging. The perverse (Gresham's) dynamics that the accounting control frauds had caused that destroyed wealth and jobs had been eliminated or minimized. Even the most elite frauds and their elite political allies were held accountable. Bank Board Chairman Gray led the successful reregulation in late 1983-mid-1987 over the intense opposition of the Reagan administration, a majority of the House of Representatives, Speaker Wright, and the five U.S. Senators that became known as the "Keating Five." Paul Volcker was Gray's sole powerful ally. Wright and the Keating Five intervened on behalf of the two worst control frauds in America. S&L regulators had their careers destroyed, but continued to buck the frauds and their political patrons and do their duty to the public.
In 1991-1992, the OTS' West Region used its supervisory powers to squash a fast-developing trend among a number of California S&Ls to make "liar's" loans. We recognized that such loans were inherently unsafe and unsound and frequently fraudulent. Our efforts were so effective that Long Beach Savings gave up its federal charter to escape our regulatory authority. It became a mortgage banker and rebranded itself as Ameriquest -- the most notorious of the early non-federally regulated lenders specializing fraudulent and predatory nonprime loans.
What happened after September 1993 is that OMB and Treasury, in alliance with Fed Chairman Greenspan and Senator Gramm, lost the accurate understanding of why vigorous financial regulation is essential and how one makes regulation effective. OMB, Treasury, Greenspan, and Gramm adopted anti-regulatory policies that were intensely criminogenic. We had to reregulate without the benefits of the criminology studies by Pontell, Calavita and Tillman and Akerlof & Romer's economic studies. The Clinton and Bush administrations had the advantage of all our research and our demonstration of which financial regulatory policies succeed and which fail. (They also had the benefit of the public administration scholars' books and articles that studied used our reregulation and concluded that it was an exemplar of effective regulation.) Unfortunately, the "completely failed" economic dogma that the Clinton and Bush administrations, Greenspan and Bernanke, and Senator Gramm shared led them to ignore our successes and adopt anti-regulatory policies that were so perverse that they were intensely criminogenic.
The recent epidemics of accounting control fraud, the creation of the largest bubble in history, and the Great Recession could not have occurred if the Clinton and Bush administrations had actually learned a great deal about what works and what fails in regulation. The Clinton and Bush anti-regulatory policies created the "three des" -- deregulation, desupervision, and de facto decriminalization. In late 2008, however, then-Senator Obama proclaimed that he had learned the correct regulatory "lessons" from the resulting economic collapse. From the Washington Post:
"John McCain has spent decades in Washington supporting financial institutions instead of their customers," [Obama] told a crowd of about 2,100 at the Colorado School of Mines. "So let's be clear: What we've seen the last few days is nothing less than the final verdict on an economic philosophy that has completely failed."
Senator Obama was correct -- the Clinton and Bush anti-regulatory policies were a catastrophic failure that permitted the epidemics of fraud that drove the Great Recession and the loss of over 10 million jobs. OMB was among the most virulent opponents of vigorous financial regulation because it has long been dominated by anti-regulatory economists embracing the "economic philosophy that has completely failed." Bush selected financial regulatory leaders on the basis of the strength of their anti-regulatory zeal. President Obama was incorrect, therefore, in his February 3, 2009 directive to the OMB about the improved understanding of regulation. "Years of experience" have not taught the theoclassical economists "far more" "about what works and what does not" in regulation. The theoclassical economists know vastly less about effective regulation now than did OTS in 1993.
The University of Chicago economists that President Obama appointed to senior positions related to regulatory policy scorned financial regulation. Austan Goolsbee, now Chairman of the President's Council of Economic Advisors poured scorn on those who warned of the urgent need to regulate nonprime loans. In a March 29, 2007 column in the New York Times, Goolsbee derided those warning that nonprime loans were a "time bomb."
This column shows why the reasoning and methodology that Goolsbee employed "completely failed" because it relied on anti-regulatory dogma rather than sound economics and white-collar criminology. The column also shows that Obama's regulatory review policy embraces Goolsbee's "completely failed" anti-regulatory dogma and methodology and ignores the sound findings and methodologies employed by successful regulators, economists, and white-collar criminologists. Obama is correct that white-collar criminologists and non-theoclassical economists have learned "far more" "about what works and what does not" in regulation. He is incorrect that his economic team has learned these "lessons."
He is walking a tight-rope. Too much to the left and he loses support (evidence the last election) and becomes ineffectual. Too much to the right and he will fail to accomplish the goals (specifically bringing Americans into the middle class) that he most clearly desires.
His approval ratings have jumped in the last weeks after making symbolic moves towards the center (i.e. - to the right of the left) through his speeches and appointments. The fear, of course, is that he becomes insulated from reality by the people in his inner circle. But as long as he maintains a level of contact with people like Elizabeth Warren, Joe Biden (who at least talks about the middle class), Christina Romer, and others who are aware of where our country has been going in terms of concentration of wealth, then there is hope (excuse the overused standard descriptive noun).
I think the pragmatist in Obama is attempting to get the debate out in the open. Putting Goolsbee at the top is perhaps the most effective way to bring his approach into open discussion. Addressing government regulation is, I think, his way of listening to the business community and telling them "I hear what you are saying, now come up with practical solutions to these issues".
We'll see how it all comes out in the end, but it's hard to imagine anyone more fit to deal with the practical issues involved in managing this behemoth.
Economic State Of The Union: The Future Will Likely Be Worse
"The United States continues to live far beyond its means while losing its once uniquely dynamic productive expertise and its financial independence. The standard business news narrative is that the United States is now 18 months into recovering from the worst downturn in 70 years. Private sector jobs grew in each of the past 12 months. Industrial production, real wages, after-tax incomes and personal spending are all rising with monthly savings up from post-1933 lows three years ago. Prices are stable. Global corporate profits and Wall Street bonuses are again at record levels, helping reflate equity markets to 28-month highs.
But in the first U.S. economic lost decade since the 1930s, there are still 3.2 million fewer private sector jobs than there were 10-years ago, including one-third fewer manufacturing jobs. There is less private investment and less real per-capita net worth. Income inequality is at the highest level since the 1930s, and the median real annual income of men with a college degree is less than it was for men with four years of college in 1966. No surprise, consumer spending this decade is the weakest on records back to WWII..."
what we did and what we should do. Put 50 in a room and you will always get a split.
Mr. Black may be highly respected but he is just one voice in a field of many who would disagree
with him.
Considering we just came through a time this Country has not seen since 1929
and a World Wide Economic crisis I'm pleased. Why we should expect our
recovery to be faster now than it was then is surprising to me.
Although I do believe we could have been farther along had we had Republican Party
support in economic issues and or maybe even have benefited from a proposal by them.
1600 Pennsylvania Ave.
Washington D.C.
THIS IS AN OUTRAGE!!
MEXICO CITY — US giant General Motors will invest $540 million to produce two low-emission motors in central Mexico, the company announced here Thursday, accompanied by President Felipe Calderon.
The latest project for GM in Mexico would create 500 direct and another 500 indirect jobs in its plant in Toluca, Calderon said.
GM has four plants in Mexico, and has invested some $5 billion here since 2006, Calderon said.
GM was left reeling by an industry slump when the global economic crisis hit. It received 49.5 billion dollars from the US Treasury and emerged from a bankruptcy restructuring in 2009.
It successfully returned to public trading last November by raising 23.1 billion dollars in an initial stock offering -- the largest in history.
I ask, in all seriousness, why it is that your articles, like this one, that show incontrovertibly the errors of this current president, are never the lead story here?
Just once, I would like to see those who still support this president, forced to deal with the facts.
... and Obama continues on his destructive course thinking his supporters will swallow the koolaid mixed up by those we sent him there to clean out.
The hypocrisy of his flipflop on this issue alone is so obvious, he must wake up every day expecting the charade to have unravelled.
I can't help but think he is acting as if the old media outlets still had a monopoly and the Internet didn't exist... becoming what you ran against will be noticed and called out even if the NYT refuses to report on it.
Among them that the current global capitalistic system is "best." This arises from a comparison to state centralized economies (ie eastern bloc Communism) with their fatal flaws. But the proper conclusion is that while the present system is better than total inefficiency, that doesn't make it good per se.
Another assumption is that capitalism is the same as free enterprise. It isn't. Capitalism ( a word coined by Marx) is the privedging of money, aka supply-side. Which holds that only finance is important-- no attention needed to manufacturing, mercantile, or labor. As if no one ever has to make anything physically exsistant. In contrast, free enterprise is the private production of real goods and services.
Yet another assumption, one bizarre on the face of it, is that by some occult process individual greed adds up to common good. In spite of all evidence to the contrary, this Enlightenment optimism is still proclaimed. Ignore those "d's" like deregulation, mentioned above.
The predictive value of a theory is how it is judged. Whose versions have been closer? Those correct are still being ignored-- while the cheerleaders for status quo are still around. Points to something other than rationalism. Clearly this is about a belief system.
A belief system which requires us to put it first. Materialism uber alles; the only purpose of life. Those feeding it are willing to sacrifice our democracy, our lives, the ecology, and our future for its survival.
His pro-people gestures are all symbolic.
His pro-money gestures are what count.
http://www.opensecrets.org/pres08/contrib.php?cycle=2008&cid=N00009638
Top Contributors to Barack Obama | OpenSecrets
So was McCain.
http://www.opensecrets.org/pres08/contrib.php?cycle=2008&cid=N00006424
Top Contributors to John McCain | OpenSecrets
I'd call that "malfeasance", wouldn't you?
How come when Obama does it it's the "moderate and centrist" action of an "adult"--when Bush did it it was "an economic philosophy that has completely failed".
He may well be the most skilled hypocrite of our time.
Obama was chosen to be the "little bit of sugar (that) helps the medicine go down!"
And a bitter pill it is indeed.
He is the kind, articulate, intelligent, face that the Oligarchs have put on this next step in their raid on the Treasury and elimination of the American Middle Class.
Obama was chosen to be the "little bit of sugar (that) helps the medicine go down!"
And a bitter pill it is indeed.
Reality is not enough money is coming in as to the amount going out. The reality is the pork is larger then the pig and no party is willing to say the empire's money chest is empty. So we have the grand play in Washington while somewhere a few real economists are telling their bosses that we are a train on a track with no bridge over the river because it was used for a new football stadium.
To be truthful it will take all of America being treated equally to make the changes needed and Americas hate this idea. It will require equality by all in taxes and becoming a part of the solution to turn America around. This will be fought by the old, education, law and even religion because each feels they deserve special treatment.
Special treatment. Equality. Fairness. Instead of these words how about being American and being willing to work for America.
The American party is willing to treat each American equally. Not special but equal. Are you willing to help America by allowing your self to be equal, to be an American and roll up your sleeves to rebuild America?