Said without Joy: We Told You So
Is it fair to complain about the actions of the financial deregulators?
Could anyone reasonably have foreseen the consequences of a decades-long regulatory holiday for the financial sector?
In a word, yes.
In preparing "Sold Out: How Wall Street and Washington Betrayed America," a report that documents a dozen deregulatory steps to financial meltdown, it was remarkable to see that, at almost every step, public interest advocates and independent-minded regulators and Members of Congress cautioned about the hazards that lay ahead. Those ringing the alarm bells were proven wrong only in underestimating how severe would be the consequences of deregulation.
Policymakers ignored the warnings. Good arguments could not compete with the combination of political influence and a reckless and fanatical zeal for deregulation. $5 billion -- the amount the financial sector invested in the financial sector over the last decade -- buys a lot of friends.
Example: Consumer groups warned of a growing predatory lending scourge at the beginning of this decade (and even in the 1990s), before the housing bubble inflated.
"While many regulators recognize the gravity of the predatory lending problem, the appropriate -- and politically feasible -- method of addressing the problem still appears elusive," wrote the National Consumer Law Center and the Consumer Federation of America in January 2001 comments submitted to the FDIC.
What was needed, the consumer groups argued, was binding regulation. "All agencies should adopt a bold, comprehensive and specific series of regulations to change the mortgage marketplace," the groups wrote, so that "predatory mortgage practices are either specifically prohibited, or are so costly to the mortgage lender that they are not economically feasible."
Example: In 1999, Congress passed the Gramm-Leach-Bliley Act, which eliminated the Glass-Steagall and Bank Holding Company Acts' longstanding ban on combining commercial banks and investment banks, or commercial banks and other financial service providers. This law paved the way for the creation of Citigroup, a merger of Citibank and Travelers Insurance, and helped infuse the speculative go-go culture of investment banks into commercial banks.
When Citibank and Travelers announced their merger in 1998 -- a marriage that could only be consummated if Glass-Steagall and related rules were repealed -- my colleague Russell Mokhiber and I wrote, "Expect to see lots of bad loans, bad investment decisions, teetering banks and tottering insurance companies -- and a series of massive financial bailouts of new conglomerates judged 'too big to fail.'" We didn't envision exactly how the Citigroup and Wall Street debacle would play out, but we got the outline right. Our predictions echoed the warnings from consumer advocates.
Example: In 1998, the Commodity Futures Trading Commission (CFTC) suggested the need for regulation of financial derivatives. In a concept paper, the CFTC wrote that, "While OTC [over-the-counter] derivatives serve important economic functions, these products, like any complex financial instrument, can present significant risks if misused or misunderstood by market participants." The agency suggested a series of modest potential regulations that might have restrained the proliferation of financial derivatives and required parties to set aside capital against the risk of loss (a policy that likely would have saved taxpayers tens of billions or more in the AIG bailout).
But the CFTC initiative was crushed by the then-Committee to Save the World (so designated by Time Magazine) -- Treasury Secretary Robert Rubin, Deputy Secretary Larry Summers and Federal Reserve Chair Alan Greenspan. In 2000, Congress passed a statute prohibiting the CFTC from regulating financial derivatives.
Example: In 1995, Congress passed the Private Securities Litigation Reform Act, which made it harder for defrauded investors to sue for relief. Representative Ed Markey, D-Massachusetts, introduced an amendment that would have exempted financial derivatives from the terms of the Act. Representative Chris Cox, R-California, who would go on to head the Securities and Exchange Commission under President Bush, led the successful opposition to the amendment.
Markey anticipated many of the problems that would explode a decade later: "All of these products have now been sent out into the American marketplace, in many instances with the promise that they are quite safe for a municipality to purchase. ... The objective of the Markey amendment out here is to ensure that investors are protected when they are misled into products of this nature, which by their very personality cannot possibly be understood by ordinary, unsophisticated investors. By that, I mean the town treasurers, the country treasurers, the ordinary individual that thinks that they are sophisticated, but they are not so sophisticated that they can understand an algorithm that stretches out for half a mile and was constructed only inside of the mind of this 26- or 28-year-old summa cum laude in mathematics from Cal Tech or from MIT who constructed it. No one else in the firm understands it. The lesson that we are learning is that the heads of these firms turn a blind eye, because the profits are so great from these products that, in fact, the CEOs of the companies do not even want to know how it happens until the crash."
There was nothing inevitable, unavoidable or unforeseeable about the current crisis.
At every step, critics warned of the dangers of further deregulation. But with the financial sector showering campaign contributions on politicians from both parties, investing heavily in a legion of lobbyists, paying academics and think tanks to justify their preferred policy positions, and cultivating a pliant media -- especially a cheerleading business media complex -- the sounds of clinging cash registers drowned out the evidence-based warnings from public interest advocates and independent-minded government officials.