Hope and change in 2012
Trust but verify
The Glass-Steagall Act (GSA) of 1933 was one of the key legislative attempts to stabilize the U.S. financial system in the wake of the Great Depression. It created a banking system that separated the more risky ventures of investment banking from commercial banks. Because this approach was too restrictive for banks to be competitive, GSA was repealed in 1999 by the Gramm-Leach-Bliley Act, (aka “Financial Modernization Act”).
Under the 1999 law signed by Bill Clinton banking institutions were allowed to provide a broader range of services, including underwriting. Citigroup, Bank of America and J.P Morgan Chase have been cited as major benefactors of the 1999 law. They owned a vast network of bank branches, bought and sold stocks and managed corporate mergers. While the 1999 law made American banks more competitive internationally, it left unanswered the fundamental question of how to balance risk with the need to compete. One of the few U.S. Senators to oppose the bill that passed by a margin of 90-8 was North Dakota Republican Byron Dorgan. A New York Times article (Leonhard, 9-9-08) quotes Dorgan as saying, “I think we will look back in 10 years’ time and say we should not have done this, but we did because we forgot the lessons of the past…and that which is true in the 1930s is true in 2010.”
As if the 1999 law were not enough. There had to be more deregulation, and this one signed by lame duck President Bill Clinton in December 2000 was the mother of all deregulation, the “Commodity Futures Modernization Act”. This was passed in the name of updating laws to match the competitive genius of U.S. financial captains. It paved the way for the growth of the financial derivatives market by restricting regulation of over-the-counter derivatives like credit default swaps. The measure was supposed to resolve a jurisdictional dispute between the Securities Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) and allow more trading of stocks in the same commodities fashion as they were being traded in European markets. Some analysts find this law also opened the door for banks to be more aggressive in mortgage investments
We should not forget that the root causes of our current financial crisis is more than a question of poor management and outdated government policies, including over-taxing and deficit spending. We must also address a question at the very heart of our capitalist system. How can we do a better job to create a climate that rewards altruism and punishes, rather than praises, greed? While the answer comes partly in a better system of regulation, it is very much a question of culture and how Americans view the meaning of freedom. The breadth of issues, cultural and religious values that underpin cultural values cannot be covered adequately in this brief column. In the narrow topic of regulation, we know we need to find policy makers, managers and administrative staffers who understand how to balance the need for regulation with freedom to make mistakes. Too often we find bureaucrats who have too much power through their office to restrict freedom in the name of protecting the public.
It seems American policy makers have yet to discover a good recipe either for regulation or to control the regulators. The problem with regulatory policy is that its effects are not felt until sometime after implemented. As for the regulators, we have little control over them, which is another problem when you have too many regulations.
How can Americans know if re-regulation or de-regulation is effective? Perhaps it all comes down to a matter of trust in the people we elect to office. I say, trust, but verify. Whomever we elect, needs to be monitored to make sure they do as they promised, and to see if the regulations and laws they pass, are effective and implemented appropriately. It is not only our job to be informed and to take part in the nomination and election process. We also need to communicate our concerns regarding performance of the regulators. Legislative oversight, administrative audits and public reports are among the many ways elected officials have to control the regulators. This part of their job is not as glamorous as making policy, but it is equally important. This is how a functional system of checks and balances should work. How is it working for you?