Where have I heard this before?
I don’t think the Wall Street Journal would allow me to copy every Thomas Frank column on this blog (I sometimes wonder how they can bear to run the column themselves). But it’s been a few weeks since I last mentioned him, and in that time a lot has happened. The champions of deregulation, including McCain’s economic advisors and, yes, including McCain, must now answer for the spectacular failure of their policies, which protected and even encouraged reckless practices in the financial industry. Instead, they will bemoan the excesses of a few rogues, insist that this not count against their free-market mania, and try to convince us that no one saw this coming. Puts me in mind of the neocons who, after it became clear that we weren’t going to find any weapons of mass destruction in Iraq, shrugged and said, “Well, everyone was wrong.” The same dodge, the same party. Here’s Frank:
There is simply no way to blame this disaster, as Republicans used to do, on labor unions or over-regulation. No, this is the conservatives’ beloved financial system doing what comes naturally. Freed from the intrusive meddling of government, just as generations of supply-siders and entrepreneurial exuberants demanded it be, the American financial establishment has proceeded to cheat and deceive and beggar itself — and us — to the edge of Armageddon. It is as though Wall Street was run by a troupe of historical re-enactors determined to stage all the classic panics of the 19th century.
By the way, this is the same system the Republicans would still apparently like to put in charge of Social Security. The same system that is minting millionaire CEOs, that is holding the line on wages, and that we will be bailing out for years.
On Monday, John McCain blamed the disaster on “greed by some based in Wall Street.” It’s a personal failing of some evil few, in other words, and presumably capitalism will start working again once we squeeze the self-interest out of it. In the weeks to come, maybe Sen. McCain will also take a bold stand against covetousness and sloth.
Read the rest here.
on September 17th, 2008 at 6:27 pm
McCain isn’t going to be able to help us. He has Phil Gramm as his advisor.
Senator Deregulation.
on September 17th, 2008 at 6:34 pm
Michael
You broke the code!
on September 17th, 2008 at 7:12 pm
Can you name any specific acts of deregulation (Frank obviously couldn’t) that 1) took place during the last 8 years; 2) were supported by Republicans but opposed by Democrats; and 3) conclusively would have prevented anyone from overvaluing housing stock and related securities (such as CDOs, CDSs, etc.)? Otherwise, it all smacks of the post hoc fallacy — Bush was in office, the housing and credit markets are in trouble, ergo Bush must have caused it somehow. Not a very convincing argument.
on September 17th, 2008 at 7:21 pm
Stuart, you took the words right out of my mouth. The converse is also true – nary a mention of any legislation passed by the Democratic-controlled Congress over the past 2 years which President Bush vetoed. And you are also forgetting that the post-hoc fallacy only applies to the GOP – President Clinton gets a pass for the internet bubble stoked on his watch and the crimes Enron, et al committed during his presidency.
on September 17th, 2008 at 7:51 pm
Here is a fantastic and non-partisan essay on the topic from the business/economics author Megan McArdle at the Atlantic: http://thecurrent.theatlantic.com/archives/2008/09/lehman-brothers.php
on September 17th, 2008 at 7:55 pm
Good to see that the Right is lining up its talking points. They’ve been a bit scarce on the subject lately.
The Administrative Branch is responsible for this kind of regulation.
Sorry boys. You broke it and you own it.
on September 17th, 2008 at 7:57 pm
Unagidon: So President Clinton “owns” Enron and the internet bubble?
on September 17th, 2008 at 8:00 pm
I’m fascinated how any time someone comes along with facts – facts – to counter vague assertions from the Obama-philes here – the first response is invariably, “Oh, hear they come with their talking points!”
You would expect a higher level of discourse on this blog.
on September 17th, 2008 at 8:01 pm
Yes. And you think that the GOP would have learned something from it. McCain was there too. What did he learn?
on September 17th, 2008 at 8:02 pm
Unagidon said: “The Administrative Branch is responsible for this kind of regulation.”
The Constitution of the United States of America, Article I, Section 8: “The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;
…
To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;
…”
My copy of the Constitution is a little dusty – where is it that the Executive Branch is given powers to regulate interstate commerce?
on September 17th, 2008 at 8:07 pm
Unagidon: Seriously, did you not think Mr. Frank’s essay was over-the-top partisan and vague? I thought the Atlantic essay I linked to above was much more informative myself.
on September 17th, 2008 at 8:12 pm
Mark, people actually in finance have known since the 1990’s that the massive trade in unregulated over the counter securities was going to blow up like this. What was needed was something that would start wiping out investment banks (and real ones) like the housing crisis.
Unlike Enron, whose collapse was limited to that company (and a couple of other bent companies like it) and even the stock bubble (which mostly affected the stock market) this latest debacle is going to be more far reaching not only because of the way the the risk was supposedly hedged in the OTC market but because the dollar is already weak and the US economy is deeply in debt. Now you may not like this, but it was your Republican Administration that allowed the banks to make these questionable loans, pursued policies that weakened the dollar (which means that anyone who loans us money has to face foreign exchange risk) and who put us into great debt to begin with. It is your Republican president’s regulatory policies, monetary policies, tax policies and war policies that caused all of these stars to align.
So yes, you are getting your talking points together. According to McCain, it was all the fault of a few greedy guys and an antiquated regulatory system and we need a maverick to clean up the mess.
Now regarding Enron and the stock bubble, Bush did not push for all of the accounting things that he should have. And regarding the stock bubble, well, your guys just rode the next one that came along, didn’t they? Are you going to tell me that the existence of the bubble was 20/20 hindsight too?
on September 17th, 2008 at 8:16 pm
Stuart,
You’ll notice I never mentioned Bush — I referred to the Republican Party, and in particular to those Republicans who have been advising McCain on economics (see, it’s not really his bag). From the last Frank column I recommended on the blog, dated July 16:
“Since the age-old longing of dirt farmers everywhere was deregulated financial markets, Mr. Gramm gave the people what they wanted. His Financial Services Modernization Act of 1999 allowed investment banks to merge with commercial banks and insurance companies. And he helped craft the Commodity Futures Modernization Act of 2000, which allowed energy trading to go unregulated, making possible certain of Enron’s amazing escapades the following year. It also sanctioned an unregulated market in credit default swaps, the financial derivatives that may be [read: have been] the next act in the ongoing credit-market tragedy.
“Mr. Gramm’s image as a warrior both for business and the worker was made possible by the pervasive fantasy that markets are democracies, that when you free them up you empower the rational-choosing little guy. Mr. Gramm wasn’t the only one mining this vein during the 1990s; market populism was everywhere. Remember, for example, the Beardstown Ladies, the investment club made up of small-town grandmothers whose success in the stock market was supposed to prove how benevolently the market would treat even the weakest among us.
“The most spectacular iteration of the theme was Dow 36,000, a 1999 book which insisted that the ’small investors’ of America had rebelled against the ‘establishment’ and realized that stocks were as safe as bonds. No whiners here: These ‘rationally exuberant’ citizen-investors were hoisting their beloved Dow all the way to 36K. (One of the book’s co-authors, Kevin Hassett, is another economic adviser to Mr. McCain.)”
Says here that the Commodity Futures Modernization Act of 2000 (H.R. 5660) was introduced in the House of Representatives by Rep. Thomas Ewing (R-IL) and cosponsered by Rep. Tom Bliley (R-VA) Rep. Larry Combest (R-TX) Rep. John LaFalce (D-NY) Rep. James Leach (R-IA). That’s right, one Democrat: you got me. You asked for something in the last eight years. Well, there it is — though I confess I don’t see what special significance attaches to that number, as if the Republican Party hasn’t been burning incense at the altar of deregulated markets for decades.
And, yes, MAT, Bill Clinton signed the Act into law, as a part of H.R. 4577. He also deferred to the omniscience of that great Ayn Rand disciple and blower of beautiful bubbles, Alan Greenspan. You’ll get no defense of Bill Clinton’s economic policies from me.
And how about the ad-hoc, post-facto fakery of McCain pretending to be a great advocate of regulation. The man’s rhetoric, like his record, is fundamentally unsound.
on September 17th, 2008 at 8:16 pm
Mat and Stewart, what about the greed started in the Reagan years by Abramoff who is in jail and with others to follow. All of this brewed and was fostered with the Contract with America that other publicity stunt. At least Bush was not so crazy as to pardon Abramoff. But he might do it before he leaves office.
As I wrote here on Sept. 12: “The Republican party has been taken over since the early eighties by a bunch of college students (now former) who got money from businesses who would profit from their destruction of groups seeking to improve government. As Thomas Frank writes in his new book The Wrecking Crew: “For most of the past three decades these insurgents
have controlled at least one branch of government; they were underwritten in their rule by the
biggest of businesses; they were backed by a robust social movement with chapters across the radio dial. Still they remain the victims, the outsiders; they fight the power, the establishment, the snobs, the corrupt. John McCain rails against Washington
as the “city of Satan”-which in any sober theology would make him Lucifer’s lieutenant.”
One of the Founders of this movement, if not the Founder, Jack Abramoff is in jail. But he has left legions who are profiting from government and who do not care about the country. Greed is their motive. It is still happening. Even some Republicans are amazed at the corruption.
http://www.nytimes.com/2008/09/12/opinion/12fri1.html?_r=1&ref=opinion&oref=slogin
Palin and McCain are again fostering the disillusionment that they are outsiders.”
on September 17th, 2008 at 8:26 pm
And remember Iran Contra by that great manipulator Oliver North. Here is Thomas Frank on that and more.
“The single biggest scandal of the Eighties resulted
from a confluence of the two great conservative
themes ‘I have been describing: the
“freedom fighter” mentality and the cult of political
entrepreneurship.
The outlines of the Iran-Contra story are well
known. President Reagan’s CIA was waging a
“secret” war against the Sandinista government
of Nicaragua; the Democratic Congress understandably
objected, as we were technically at
peace with that nation, and, in 1983, cut off
funds to the CIA-backed Contras, Over at the
National Security Council, however, Marine
Lieutenant-Colonel Oliver North came up with
a scheme to get money to the Contras anyway, using
a network of private donors, weapons sales to
Iran, and private supply operations. He also organized
behind-the-scenes efforts to lobby Congress
to change its mind.
Quite early on in the annals of Iran-Contra our
pioneering political entrepreneurs make their inevitable
appearance. Jack Abramoff crops up in
North’s notebook for February 14, 1985, his name
, misspelled but the beginnings of a great lobbyist
unmistakable. On March 26, Abramoff showed
up on a list of people helping North to influence
the upcoming Contra-aid vote in Congress. Later
that day, Abramoff phoned North and told
him that a number of “votes” were available in exchange
for some or other favor.
We do not ordinarily remember Iran-Contra for
the business opportunities it generated, but in
the long, winding history of conservatism-asindustry
it remains a particularly instructive chapter.
The aforementioned political entrepreneur
Spitz Channell, for example, sensed the Contras’
potential early on and used them to become
the most successful fund-raiser in all of Washington’
circa 1985. Channell’s marks were conservative
widows; he made his pitches in person,
often using a scary slide show put together by
Oliver North about the dangers of Nicaraguan
communism. Not only did his donors reap tax
write-offs by giving to one of the “nonprofit”
groups Channell had set up but they sometimes
got to meet President Reagan too; a favor the
fund-raiser arranged simply by throwing some
44 HARPER’S MAGAZINE / AUGUST 2008
change to one of the president’s former aides.
None of this put much money into the pockets
of the Contras, though. On the right, the
fund-raiser typically prospers, even if the cause
does not. And Channell was a professional; he later
admitted that he became interested in
Nicaragua only after he noticed how the subject
ticked off rich folks. He proceeded to take the customary
profiteering to dizzy entrepreneurial
heights. Of the $12 million raked in by Channell’s
empire of fund-raising organs in 1985 and 1986,
it is estimated that only $2.7 million actually
made it to the Contras. Huge sums were diverted
to Channell’s friends, his lover, and his friends’
lovers. All the middlemen between here and Managua
took a cut, too.
Iran-Contra was the scandal with the Midas
touch, and it continued to rain money on the
faithful even after the whole rotten operation had
been rolled up. One day in July 1987, as the Democrats
in Congress screeched hysterically about the
White House and its illegal foreign policy, Ollie
North put on his uniform, stood before the cameras,
raised his hand, and summoned up a backlash
that ultimately crushed the liberals and
brought a flood of prosperity to the political entrepreneurs’
of the right.
Jack Abramoff’s IFF, for example, started selling
copies of an Ollie North videotape made up
of a slide show that was almost certainly the one
Spitz Channell had used to scare his dotards, advertising
it with a photo of the stern-faced Marine
testifying before “the so-called Iran/Contra
congressional committee.” Oliver North videotapes
eventually became something of an industry
unto themselves, but the one made by
Abramoff, titled Telling It Like It Is, is almost certainly
the only bit of filmed entertainment ever
to be dedicated “to the memory of William J.
Casey,” the CIA director made famous by his
unabashed contempt for Congress.
The trade in Olliana boomed for years, as the
persecuted patriot was indicted for his crimes and
came to require a legal-defense fund (and also, apparently,
a host of fake legal-defense funds). Jerry
Falwell compared Ollie to Jesus Christ. There were
Oliver North keychains and pocketknives and Tshirts
and eventually even a TV show in which Ollie
told America the secrets of war. There was the
usual round of plunder, as funds raised to help Ollie
stayed with the fund-raisers instead. And inevitably
there was “Ollie, Inc.,” as the man himself
went into the nonprofit direct-mail business.
By 1994, when he ran for a Senate seat in Virginia,
Oliver North had become the most successful political
fund-raiser in the land, bringing in some
$20 million over the course of his campaign. Remarkably, he lost anyway.”
on September 17th, 2008 at 8:45 pm
Matthew Boudway: I realize you will not defend President Clinton on this matter, so I won’t push it, but if he signed both of those bills into law without veto, how is this a uniquely Republican issue? It’s not like President Clinton is some kind of pariah in the Democratic party – based on my viewing of the DNC in Denver, he is held in very high regard within the party, and in fact his economic policies were lauded at the convention.
on September 17th, 2008 at 8:47 pm
“My copy of the Constitution is a little dusty – where is it that the Executive Branch is given powers to regulate interstate commerce.”
If you blow the dust off the part that refers to the Executive Branch, you may notice that it is the Executive that enforces the regulations.
Or in the case of Bush, “enforces” the regulations.
on September 17th, 2008 at 9:00 pm
Stuart, you need to come up with harder challenges.
1. Gramm-Leach-Bliley; passed in 1999; opposed by most Democrats
“Basically, a major piece of deregulation, the Gramm-Leach-Bliley Act, overturned most of the laws that had kept commercial banks and investment banks separate. This made it much easier for monster-size banks to lay down enormous bets on the direction of housing prices.”
2. “The Commodity Futures Modernization Act,”
in December 2000, Gramm, while a U.S. Senator, snuck in a 262-page amendment to a government re-authorization bill that created what is now the $62 trillion market for credit default swaps (CDSs). CDSs are like insurance policies for bondholders. In exchange for a premium, the bondholders get insurance in case the bondholder can’t pay.
Gramm’s amendment 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.”
http://www.bloggingstocks.com/2008/09/15/100-year-crash-mccain-advisor-spurred-62-trillion-derivatives/print/
Gramm was also responsible for the legislation that enabled Enron to evade accountability. He gets super bonus points for this one because his wife was on the board of Enron at the time.
on September 17th, 2008 at 9:08 pm
Unagidon: Fair enough – Article II, Section 2; I personally think it’s not as black-letter as you but let’s go with your construction. Is the issue then that there are regulations not being enforced or that there should be more regulation? It seems to be like Mr. Frank is arguing that it is the later – do you see it the other way? Or both? Do you not think the Democratic congress has any culpability here, to the extent we are assigning culpability?
on September 17th, 2008 at 9:13 pm
I have no reason to trust Mr. Frank’s breezy assertion that these acts caused or contributed to the current situation. Moreover, it seems revisionist to suggest that these acts were due to “McCain’s economic advisors.” Here’s what John Dingell, a prominent Democrat, said in the Congressional Record on the passage of the latter act:
on September 17th, 2008 at 9:16 pm
And Stuart, several Federal Reserve directors tried hard to convince Alan Greenspan as early as 2000 of the need for greater oversight of subprime mortgages, but Greenspan categorically refused even to consider the move.
“Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.”
on September 17th, 2008 at 9:17 pm
Barbara: Leaving aside that President Clinton, a Democrat, sign both of those into law without veto, what is objectionable about Gramm-Leach-Bliley? Not one institution which was created as a result of that law has failed, in fact, it is the opposite – only investment banks (Lehman Brothers, Merrill Lynch, and Bear Stearns) which decided NOT to merge with a commercial bank have failed. It is precisely that law which has avoided a much worse crisis. Citigroup, B of A, JP Morgan Chase – the main players created by that law have been the ones buying these independent investment banks and have weathered this storm to date.
on September 17th, 2008 at 9:44 pm
Barbara — I don’t see any reason to trust your breezy assertions either. Can you link to a serious economist who makes a detailed and well-supported argument that some specific deregulatory action actually caused the current situation? More than just post hoc argumentation. (And no, I don’t consider someone to be serious when he begins his argument by claiming that Phil Gramm “snuck in” an act that was publicly debated and supported by many Democrats).
on September 17th, 2008 at 9:45 pm
Stuart, MAT,
If either of you is prepared to say that the Republican Party — its Presidents, Senators, and Representatives — has not, overall, been more in favor of deregulation of the financial industry than the Democratic Party, please say it now. No more finding centrist Democrats who voted with the Republicans or signed their bad initiatives into law or can be quoted talking like Republicans. That’s a mug’s game. The point is that while not every Democrat was a critic of deregulation, nearly every Republican was a supporter (and that “nearly” may be an unnecessary hedge). Yes, MAT, many people, including those who cheered Bill Clinton at the Denver Convention, make the mistake of assuming that Presidents are responsible for whatever the economy does while they’re in office. Clinton does not deserve all the credit he is often given (and always takes) for the prosperity of the ’90s, much of which was the result of another bubble. I’ll give him credit for his fiscal policies, which weren’t great, but look very, very good when they’re compared to those of our current President. But if it’s not true that the President should get all the blame or credit for what happens to the economy under his watch, that doesn’t mean he can’t be blamed for particular policies and oversights that have a demonstrable effect on the economy. Until about five minutes ago, Republicans were telling us that Democrats were in love with big government. Now we are hearing from Stuart and his comrades that there has really been no important difference between the Republicans and the Democrats on these issues. Once again it’s “Well, everyone was wrong.”
on September 17th, 2008 at 9:47 pm
If either of you is prepared to say that the Republican Party — its Presidents, Senators, and Representatives — has not, overall, been more in favor of deregulation of the financial industry than the Democratic Party, please say it now.
I’m not saying that, as the astute reader might have noticed. What I do say is that post hoc argumentation isn’t enough here, and I’d like a detailed and specific argument as to causation. All you have so far is a bunch of indignation and hand-waving.
on September 17th, 2008 at 10:16 pm
Stuart, I typed it out but it was too long. I see no reason to accept your breezy, defensive assertions either. You will not see what you don’t want to see. There is really no point when you define anyone who disagrees with you as breezy and unserious.
on September 17th, 2008 at 10:36 pm
Yes, I don’t see evidence that hasn’t been provided or arguments that haven’t been made. You’ve got me pegged there.
on September 17th, 2008 at 10:38 pm
MAT,
I am not going to regurgitate the lengthy answer that was eaten. The GLB was not in itself bad or good; it presented risks and opportunities. One of the things that it spurred was securitization of mortgage instruments that are at the heart of the current crisis. The CFMA more or less prohibited the regulation of those kinds of assets. When it became clear that the combination of abusive subprime mortgages and securitization fed on each other in potentially harmful ways, regulators could have headed off the worst abuses. If they had done this even two years ago things would probably be a lot less dicey today. They were warned and they did nothing.
on September 17th, 2008 at 10:39 pm
I don’t define “anyone who disagrees” with me as “breezy and unserious.” That is simply untrue. As I explained above, I think that a commentator reveals himself as unserious when he begins his analysis with such a blatant misrepresentation. I also think commentators who rely solely on post hoc fallacies aren’t being serious. But if you can manage to come up with a legitimate economist who makes a detailed and specific argument with no blatant lies in it, I wouldn’t dismiss it as unserious.
on September 17th, 2008 at 10:44 pm
Stuart,
I suspect Barbara is right, but in case she’s not, here’s a specific (thought not very detailed) “argument as to causation”: http://www.nytimes.com/2008/03/17/opinion/17krugman.html
I know, I know, Krugman is a Democrat and therefore also breezy and unserious. Well, you asked. Horses, water, etc.
There are other, longer accounts of how deregulation has caused the current mess, and they aren’t hard to find. I recommend Robert M. Solow’s review essay, titled “Getting It Wrong,” in the September 10 New Republic. I’m not sure if Solow’s a Democrat, but he did win the Nobel Prize in Economics in 1987. And Commonweal will soon be publishing an article by Charles Morris that explains what’s happening and why with admirable clarity.
Finally, a trip down memory lane. I remember it like it was six months ago — from a speech McCain gave in March outlining his economic proposals:
“[O]ur financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital.”
on September 17th, 2008 at 10:59 pm
Krugman is also a professor of economics at Harvard, and though it may be hard to believe, generally very pro-free trade.
on September 17th, 2008 at 11:01 pm
Thanks, Mr. Boudway, but I’m not sure that we’re understanding each other. What I’d like to see is a detailed and specific argument that some specific deregulatory act is to blame (because you blamed “deregulation”). Neither of your articles — interesting as they are — even tries to do so.
The closest that Krugman comes is in saying that Washington “ignore[d] the warning signs.” Whatever that is supposed to mean, it certainly isn’t specific, nor does it blame “deregulation.” Solow never identifies any deregulatory action in the past; he merely says briefly that we’ve failed “properly to regulate modern financial engineering,” which is virtually a truism at this point, but one completely lacking in specifics.
on September 17th, 2008 at 11:04 pm
Krugman is also a professor of economics at Harvard, and though it may be hard to believe, generally very pro-free trade.
When did he move to Harvard? Hadn’t heard of that. And how is free trade relevant at all here?
on September 17th, 2008 at 11:36 pm
Matthew Boudway: Mr. Solow’s book review was quite interesting and non-partisan. You should have provided the link, which is: http://www.tnr.com/story_print.html?id=5adeed59-4ca0-443a-bc34-828405d7a5f9 I think it is along the lines of the Atlantic essay which I guess is too non-partisan to be worthy of comment.
I don’t know if I would call it a “long account of how deregulation has caused the current mess” however. I also believe you are adding quite a bit of partisan spin into the following two passages from that book review:
“Could we redesign the mechanism to achieve most of the benefits of a broader supply of mortgage capital while sharply limiting the scope for predation and instability? This question calls for serious thought; but serious thought is not on Phillips’s agenda. Still, it is worth noting–and this is his sort of thing–that when the Federal Reserve recently proposed some fairly anodyne improvements in the regulation of mortgage lending, the industry instantly opposed them as incipient socialism, and claimed implausibly that even the smallest regulatory safeguards would dry up the supply of loans.”
and
“Moreover–and this is definitely on Phillips’s radar–the fact that big-time financial operators make so much money, and spread enough of it around, gives them a lot of political clout with both parties. That is one reason why it will be so difficult to reform the system of financial regulation so as to provide adequate protection for the capital market as it goes about its useful functions. The same fact may also be part of the answer to the churchmouse’s question: why does anyone who already has a billion dollars need a second billion? A bigger private jet attracts bigger birds.”
Maybe I have not drunk enough of Mr. Krugman’s Kool-Aid, but I read Mr. Solow’s review as more a “short account of how thoughtful, updated regulation could have mitigated the current mess”. My reading is that both Mr. Solow and Ms. McArdle agree a redesign of the regulatory system is in order, but neither blame de-regulation as the cause in the post hoc fashion Stuart is decrying.
on September 17th, 2008 at 11:42 pm
I hear all these arguments about who should be held responsible for deregulation of financial institutions. But might not the problem, going back to the S&L crash (for which a close friend of McCain was responsible) be due to a *lack of regulation* in the first place?
Further, given that for a generation or more we have had mostly Republican Congresses and Presidents, why shouldn’t we blame them for this crisis? I say they lacked economic foresight, or economic will, or they were in the pocket of the lobbyists.
on September 18th, 2008 at 12:15 am
Hey, Folks,
Richard Reich was just on MSNBC. He said that since 2006 Obama has been pushing for *regulation* of Wall Street, while McCain has been pushing deregulation. Reich desdribes McCain’s economics as trickle down, while, he says, Obama’s is “bottom up” economics. Hmmm. Interesting. Maybe I’ll look at Reich’s new book..
on September 18th, 2008 at 12:19 am
Ann Olivier said: “…given that for a generation or more we have had mostly Republican Congresses and Presidents…”
Actually the House has been controlled by Democrats for 38 of the last 50 years, the Senate for about 32 of the last 50, and about 20 of the last 50 for the Democrats in the White House.
on September 18th, 2008 at 12:22 am
Ann Olivier: Could it have been Robert Reich, Secretary of Labor under President Clinton? I think he’s a frequent guest on MSNBC’s economics panels.
on September 18th, 2008 at 12:59 am
MAT –
Himself.
on September 18th, 2008 at 12:59 am
MAT
“Actually the House has been controlled by Democrats for 38 of the last 50 years, the Senate for about 32 of the last 50, and about 20 of the last 50 for the Democrats in the White House.”
True, but which period? I think the Republican’s have been in control the last 15 years or so, and you can’t attribute blame to the Democrats for what has happened now.
As one who was a banker for 30 years, I think it is rather disingenuous to suggest (as McCain seems to have done) that this is the fallout of a few people’s greed. A few people cannot subvert the system to this extent. In fact it is the greed inherent in the system which has subverted the minds of those without scruples. So much so that even while they are not saying it aloud people had begun to agree (with Gekko in “Wallstreet”) that “Greed is good”
I am not in the U.S. but in India. I worked through the period when India moved from a closed Economy to the Capitalist model. And I can see the same thing happening in our business culture. When I started working, in the mid 70s, the policy was basically that “we are a service industry and if we give good service, do our job properly, the rest will take care of itself.” But now the undertone is, you give as much service as makes profit, concentrate on the profitable segment and the rest be damned. Whether we like it or not, the President of the U.S. is the most powerful person in the world, and so we non-americans also have some interest in the election. (For me the added fact that 2 of my 3 children have settled in the U.S)
on September 18th, 2008 at 6:22 am
Stuart quoted: “By authorizing the SEC to apply Section 10(b) of the Securities Exchange Act of 1934 to these swap agreements, the bill provides important additional protections to the vital and dynamic markets for these instruments. In extending these protections, the bill explicitly makes rules adopted under Section 10(b) to address fraud, manipulation, or insider trading applicable to securities-based swap agreements. Thus, the antifraud rules currently in existence–and those needed in the future–apply to such swap agreements to the same extent that they apply to securities.”
I am glad to see that you can quote the statute, so I am going to assume here that you understand it because you are in the business.
As you know, one of the things that makes the heavily regulated commodity markets work is that all commodity trades can be easily marked to market at the end of the day (or actually at some point during the day, since the global markets don’t really close any more). However, although swaps and other kinds of more exotic instruments are tied to regulated markets like commodities that can be marked to market, the swaps themselves cannot easily be tied. There isn’t some kind of plain vanilla swap exchange out there. If one can’t mark one’s book to the market, then one cannot assess the risk, especially when the market value of the counter party’s book is unknown. How does one account for market volatility which, as you no doubt know, is part of the risk calculation.
So all these nice words about regulation are really rather hollow. Yes, someone can be prosecuted for fraud, but the hard part is proving that someone bought or sold something that they claimed was one price but that they knew was in fact another. Or that someone bought or sold something wherein they knew the underlying risks because it was unambiguously linked to something that could clearly be assessed relative to an open and publicly priced market.
Earlier you said: “conclusively would have prevented anyone from overvaluing housing stock and related securities (such as CDOs, CDSs, etc.)” But as you know, if you know enough to understand the significance of the regulation you cited, the problem wasn’t that there was a bubble as such. The problem is that bubbles can’t be sustained. In order to sustain a bubble based on borrowing, banks (that were regulated by our Republican president) loosened their risk controls on borrowing. And it is not that the related securities were over valued. It is that the regulations did not (as your citation clearly shows) the securities to be clearly valued.
I will also add that all this talk about post hoc theorizing, also known as Monday Morning Quarterbacking, sounds a lot like what the Administration said after Iraq and Katrina. But “no one could have known” is not a fit substitute for “we didn’t know”. Your guys in fact didn’t want to know. I don’t see any financial houses that are based on mark to market instruments failing. Do you?
on September 18th, 2008 at 7:38 am
Posteed by EPaul
on Thursday, September 18, 2008
VOTE
Duets being sung with lyrics of blame for the collapse of debt onto Wall Street towers are entertaining. It helps, as I deceive myself only too well, to vent. Still unaware that the lawyer, who has self for one, is a fool. Twice.
There is another duet being sung by the right ones, Sarah and John. Entertainers, even amateurs, have a way about them: subtle, deadlier than terrorists, charming. Reviews by music critics swell in the ocean of reportage on this presidential campaign, but are drowned out, apparently, by the tolling of the polling bells, which toll for us. Whelmed by the mountain of surf from the farthest of the right, the West of Alaska and Arizona, whence storms of Cat 9 or greater roar in the fury of treason defying reason, we in the nearer right and the center and the left, complacently refuse to digest the daily polling tolling, which declares wildly, that half of us applaud this duo campaigning to wipe us all out of the quiet and peaceable enjoyment of our greatest pride, “Civis Americanus sum.— I am an American citizen.”
The fools we turn to for counsel portend, that November 4’s majority will preserve and protect the Constitution of the United States of America, because our current leaders have failed to fulfill that solemn vow, sworn eight years ago. The polling majority of this very day, however, predict, “Not so. Not so.” And all of them sit in thrall, as the singers sing their song.
The less confident and more unsure, the pusillanimous among us, fear.
Sarah and John sing lyrics of prison hotels and bridges to nowhere and lies and flag, to the clapping fists and stomping feet of their adoring fans. Who vote. This duo are terrorists who will prevail, with less than airplanes into towers and suicide bombers in shopping malls, so-called terrorists, willing to die to enter eternity in pursuit of the glory exploding in defeat of Satan. Us.
Our anchors and their pundits and their polls inform us daily that we are still unaware. As we were on 910.
Life, liberty and the pursuit of happiness are alienable.
And yet, we, too, can vote.
So.
Vote.
+++++
on September 18th, 2008 at 7:56 am
Oops — you’re right Stuart: Krugman is “only” a professor of economics at MIT (I confuse them in my mind sometimes when it comes to economics). It’s Larry Summers who is the Harvard economist I was probably thinking of.
But actually, Krugman recently moved to Princeton so he’s not at MIT anymore.
At any rate, I am done negotiating against myself. It’s insufficient for you to exclaim that other’s arguments don’t measure up when you don’t offer any specifics of your own.
on September 18th, 2008 at 8:17 am
Krugman moved to Princeton in 2000, but I suppose that’s at the outer edges of “recently.”
I’m not the one who needs to offer “specifics.” I don’t have enough understanding of this financial crisis to say — affirmatively — what the cause was. Thus, you don’t find me saying that it was definitively this or that regulation, or this or that behavior on the part of banks, or whatever. If I did so, it would be quite appropriate for someone to say, “And how do you know this? Can you provide a specific and detailed argument on the point?”
It is you, Mr. Boudway, Unagidon, etc., who have — thus far — tried to make an affirmative case that “deregulation” was the cause, but who don’t seem to be able to spell out a detailed argument. Hand-waving citations to irrelevant congressional acts supported by Democrats, hand-waving references to Krugman op-eds that don’t even address deregulation — none of that is convincing or reasonable.
on September 18th, 2008 at 8:23 am
Follow the money. Always.
Thomas Franks wraps it up:
“There is so much money in conservatism these
days that Karl Rove rightly boasts, “We can now
go to students at Harvard and say, ‘There is now
a secure retirement plan for Republican operatives.’”
The young people who, like Jack Abramoff
before them, have answered conservatism’s call
over the past three decades were obeying their
conscience, perhaps, but they were also making
a canny career move.
Canny career moves are just about all we can
expect from conservative government these days:
tax breaks for wealthy benefactors, wars started
and maintained for the benefit of American industry,
fat contracts granted to the clients of the
right consultant. Like Bush and Reagan before
him, John McCain is a self-proclaimed outsider,
but should he win in November he will merely
bring us more of the same: an executive branch
fed by, if not actually made up of, lobbyists and
other angry, righteous profiteers. Washington itself
will remain what it has been-not a Babylon
that corrupts our pure-hearted right-wingers but
the very seat of their Industry Conservatism, constantly
seething and effervescing, with tens of
thousands of individuals coming and going, each
avidly piling up his own tidy pile but between
them engaged in an awesome common project.”
on September 18th, 2008 at 8:24 am
And I’m not saying that deregulation definitely was NOT the cause either. It could have been, for all I know. But as someone who knows quite a bit about regulation in other industries — both from clerking on the D.C. Circuit, writing law review articles, and legal practice — it’s depressingly familiar to see commentators who invoke “deregulation” when they don’t seem to know anything further about the subject. It’s just a catchword that they picked up somewhere.
So whenever I see that word — unaccompanied by any specifics or citations — a red flag goes up. My reaction is, “Whoa, what do you mean ‘deregulation’? Give me a citation. Then explain exactly what was deregulated, what the original regulation would supposedly have accomplished, and trace out the causal relationship between the deregulation and the results that you blame on it.”
on September 18th, 2008 at 9:12 am
Stuart, if you know so much about regulation, then you know that deregulation doesn’t just consist of eliminating or even not enforcing active regulations. It also means writing regulations that don’t in fact regulate. I have already explained how the regulations that you cited could not work because the things they were supposedly regulating could not be valued. You can’t regulate what you can’t see. Even now we can’t see what the extent of the damage is.
You are setting a standard and are saying that you won’t be convinced until someone links you to an article that blames someone for some regulation that was shown to have not worked. In the meantime, you argue that in the absence of this we are supposed to assume that this economic problem just came from nowhere. This is also what McCain is saying. Now either the entire world of higher finance is stupid (for not seeing this coming) or corrupt (for seeing it but in their greed not doing anything about it) OR McCain is.
What do you think?
on September 18th, 2008 at 9:15 am
MAT: Here’s a link to a plain English article about what has happened.
http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms
I agree with some aspects of it more than others, but I think what needs to be kept in mind is that there are a lot of moving parts and they were all moving in the same direction at the same time with no floor or ceiling to keep them from becoming totally out of balance.
If you have ever seen the movie Strangers on a Train, you can think of it through this image: At the end, a merry go round is spinning incredibly fast, and someone turns it off, suddenly. Because it can’t slow down gradually it self-destructs. That’s approximately what is happening, and the catalyst was the flattening and then decreasing of home values. That was like turning the merry go round off suddenly, without warning.
And regarding the regulation avenue: whatever was and wasn’t done, in late 2000 Edward Gremlich of the FR went to Alan Greenspan and warned him of the increasingly dubious subprime lending practices. Nothing was done. Sheila Bair is another FR person who tried to change standards, though she knew enough not to ask for additional regulation.
on September 18th, 2008 at 9:33 am
It can be said of the present debacle what Chaney said about getting the huge tax cut for the super rich: “We deserved it.”
Those who play the game deserve the blame.
on September 18th, 2008 at 9:51 am
Here is how Kuttner framed it a year ago, in case you think he’s just another guy who came late to the party:
http://www.prospect.org/cs/articles?article=the_bubble_economy
on September 18th, 2008 at 11:44 am
Bill Clinton balanced the budget. The first one in eons to have a surplus. He knew what he was doing. W and Co are either without a clue or they do not give a damn
on September 18th, 2008 at 11:45 am
Interesting discussion. Just a couple of add’l thoughts:
* Regarding the 1999 deregulation: I’m willing to stipulate that neither the Republican Congress that wrote the legislation nor the Democratic admistration that signed the bill (for which,btw, based on my middle-school understanding of the Constitution, the two branches of the government – and therefore the two parties – should share equal blame) foresaw that credit swaps and other exotic, unregulated, non-exchange-traded instruments would grow so enormously.
* If I may muddy the clean political divide in this discussion, my view is that there is a more fundamental regulatory failure in the current situation – the regulation that is supposed to be provided by corporate governors, i.e. the boards of directors for AIG, Lehman Bros., Fannie, Freddie, Bear Stearns, et al. Nothing new about the spectacular failure of board oversight – we could say the same for the boards of Enron and other notable corporate crash-and-burns. Still, it’s noteworthy that some players in this market are still standing and possibly even thriving.
* The answer to the question of whether this situation results from deregulation or greed is, istm, “Yes”. Regulation proceeds from the same assumption of human nature that, I’ve read, underlay the assumptions of the architects of our Constitution: that humans are fallible, sinful, greedy SOBs and can’t be trusted to do the right thing. I absolutely believe that regulations are arbitrary, unfair, counter-productive, and a drag on the economy. If we were angels, they’d be unnecessary. Unfortunately, we’re humans, and we need a legal and regulatory framework in which to conduct commerce.
* Barack Obama better figure out how to enunciate a short, punchy, memorable, intuitive proposal to solve this problem, or the best opportunity of the campaign will slip through his fingers. His advisers and financial supporters are in this thing up their eyeballs (cf Goldman Sachs executives, who btw declined to rescue these beleaguered Wall Street players and thus have fanned the flames of panic), so presumably they’re helping him with his own talking points. If the Dow doesn’t tank, the collective reaction among the electorate a week hence to this alleged worldwide crisis will be, “Huh.” Speaking once again as an individual voter, I have no reason to suppose that Obama has any more credibility on the financial markets than he does on foreign policy, but I do have an open mind and if he has anything worthwhile to say, I’ll listen.
on September 18th, 2008 at 1:00 pm
Here’s a useful article that does pinpoint a specific deregulatory action, without seeming to grind a pre-existing ax:
Here’s the rule at issue: http://www.sec.gov/rules/final/34-49830.htm
on September 18th, 2008 at 1:16 pm
It would also be interesting (perhaps only to me) to know whether there’s any blame to lay at the feet of the congressional Democrats who opposed Bush and McCain’s proposals to regulate (yes, regulate) Fannie Mae and Freddie Mac in 2003 and 2005. See http://sweetness-light.com/archive/bush-mccain-tried-to-reform-housing-finance
on September 18th, 2008 at 1:21 pm
Or see here as well: http://www.washingtonpost.com/wp-dyn/content/article/2008/09/11/AR2008091102841_pf.html
In that case, oddly enough, it was Democrats who wanted “deregulation” — or, rather, continued non-regulation. In any event, I suppose Mr. Boudway could use this as evidence to support his claim that “deregulation” is responsible.
on September 18th, 2008 at 1:30 pm
Stuart, it’s hard to know how the Republican efforts to regulate Freddie and Fannie might have affected what is going on now because much of that regulation was intended to level the field between them and private firms, not to change the underlying behavior of what was going on in the market regarding securitization of the mortgage market. If it required Freddie and Fannie to be less leveraged and more transparent, I have to believe it would have helped, but I don’t recall that being the focus of the effort.
What infuriates truly private firms about Freddie and Fannie is that they aggressively market their connection with the feds to borrow at lower interest rates. There is no doubt that they have abused various aspects of their position and talked out of both sides of their mouth, not to mention engaging in accounting fraud. I just don’t know whether any of the proposed regulations would have addressed the precise issues that are now bedeviling the market.
on September 18th, 2008 at 1:39 pm
Stuart cited: “The Commission’s 2004 rules strengthened oversight of the securities markets, because prior to their adoption there was no formal regulatory oversight, no liquidity requirements, and no capital requirements for investment bank holding companies,” a spokesman for the agency, John Heine, said.”
But the houses were evaluating their own portfolios. So this is all really just a joke, except as a CYA sort of thing, isn’t it?
on September 18th, 2008 at 2:33 pm
Jim said: “I’m willing to stipulate that neither the Republican Congress that wrote the legislation nor the Democratic admistration that signed the bill (for which,btw, based on my middle-school understanding of the Constitution, the two branches of the government – and therefore the two parties – should share equal blame) foresaw that credit swaps and other exotic, unregulated, non-exchange-traded instruments would grow so enormously.”
No. In the business we already knew that this was going to be (and already was) huge in 1992.
Jim said: “I absolutely believe that regulations are arbitrary, unfair, counter-productive, and a drag on the economy. If we were angels, they’d be unnecessary. Unfortunately, we’re humans, and we need a legal and regulatory framework in which to conduct commerce.”
No again. All that regulations need to do is to keep businesses from moving costs and risks to other parties without their knowledge or approval. This is not only good business sense, but it conforms to what the “business party” actually claims constitutes capitalist ethics. The “regulations” in place in the current crisis did not require the transparent marking to market of all of the securities involved. It’s really as simple as that.
Jim said: “If I may muddy the clean political divide in this discussion, my view is that there is a more fundamental regulatory failure in the current situation – the regulation that is supposed to be provided by corporate governors, i.e. the boards of directors for AIG, Lehman Bros., Fannie, Freddie, Bear Stearns, et al. Nothing new about the spectacular failure of board oversight – we could say the same for the boards of Enron and other notable corporate crash-and-burns. Still, it’s noteworthy that some players in this market are still standing and possibly even thriving.”
No once again. Since the only value in the market is profit making, the regulatory environment (like the taxation and labor law environment) are simply seen as additional obstacles to be overcome. It is utterly unreasonable to expect anything different, unless you want to say that capitalism is other than an economic system that is fueled by a desire for profit.
Jim said: “Barack Obama better figure out how to enunciate a short, punchy, memorable, intuitive proposal to solve this problem, or the best opportunity of the campaign will slip through his fingers. His advisers and financial supporters are in this thing up their eyeballs (cf Goldman Sachs executives, who btw declined to rescue these beleaguered Wall Street players and thus have fanned the flames of panic), so presumably they’re helping him with his own talking points.”
A qualfied yes here. But people keep forgetting that we are electing Obama to be the president of a capitalist super power, not a people’s republic. Of course his advisors are going to come at least in part from the finance sector. As for the talking points, people don’t like to talk about finance. Look at this blog. Finance discussions (when they are unconnected to what some politician is doing) get what, 10 posts? Waffles get 50.
on September 18th, 2008 at 3:00 pm
Barbara — now, at long last, you’re displaying a measure of skepticism and empiricism, i.e., asking for a demonstration of exactly what a specified regulation would have supposedly accomplished. That’s the right attitude to take — albeit across the board.
on September 18th, 2008 at 3:23 pm
“No. In the business we already knew that this was going to be (and already was) huge in 1992.”
We must be talking about different deregs … GLB didn’t become law until 1999(?) – not sure that commercial and investment banks were intermingling in 1992. Don’t think it was allowed in the US.
“Jim said: “I absolutely believe that regulations are arbitrary, unfair, counter-productive, and a drag on the economy. If we were angels, they’d be unnecessary. Unfortunately, we’re humans, and we need a legal and regulatory framework in which to conduct commerce.”
No again. All that regulations need to do is to keep businesses from moving costs and risks to other parties without their knowledge or approval. This is not only good business sense, but it conforms to what the “business party” actually claims constitutes capitalist ethics. The “regulations” in place in the current crisis did not require the transparent marking to market of all of the securities involved. It’s really as simple as that.”
You said “no” but I’m not sure what you’re disagreeing with. “Keep business from moving costs and risks to other parties without their knowledge or approval” – I guess this means requiring those who book and securitize mortgages to reveal their underlying credit risk. It appears we’re in agreement on the prudence, necessity and ethical rightness of this.
“No once again. Since the only value in the market is profit making, the regulatory environment (like the taxation and labor law environment) are simply seen as additional obstacles to be overcome. It is utterly unreasonable to expect anything different, unless you want to say that capitalism is other than an economic system that is fueled by a desire for profit.”
Corporate governance, when it works, should be looking at, and correcting, issues such as the dangerous leveraging of the company’s financial position in order to pursue short-term profits.
Lehman Bros.’ debt-to-equity ratio was something like 35:1. The board members who countenanced that deserve to be horsewhipped on the steps of their downtown Manhattan clubs. Or at least blamed prominently in the pages of the WSJ and FT.
on September 18th, 2008 at 3:26 pm
Stuart, it may be the case that I believe I have exercised sufficient empiricism about some things and not others and modulate my response accordingly.
on September 18th, 2008 at 3:42 pm
Jim said: “We must be talking about different deregs … GLB didn’t become law until 1999(?) – not sure that commercial and investment banks were intermingling in 1992. Don’t think it was allowed in the US.”
It wasn’t just the intermingling. The market for OTCs was already quite hot in the early 1990’s. (My company was thinking of playing in them at the time, but backed off because it was unregulated and we couldn’t price the risks. And we weren’t risk advese; we were a commodity trading company). Since they were so profitable (and unregulated) the commercial banks were very interested in getting into them That’s what I meant.
Jim said: “You said “no” but I’m not sure what you’re disagreeing with. “Keep business from moving costs and risks to other parties without their knowledge or approval” – I guess this means requiring those who book and securitize mortgages to reveal their underlying credit risk. It appears we’re in agreement on the prudence, necessity and ethical rightness of this.”
This is what I meant. However, this can ONLY be done via regulation.
Jim said: “Corporate governance, when it works, should be looking at, and correcting, issues such as the dangerous leveraging of the company’s financial position in order to pursue short-term profits.”
Jim, the entire American business structure is set around quarters. We are famous in the world for pursuing short term profits; so much so that it is considered a national characteristic of ours by the rest of the business world.
Jim said: “Lehman Bros.’ debt-to-equity ratio was something like 35:1. The board members who countenanced that deserve to be horsewhipped on the steps of their downtown Manhattan clubs. Or at least blamed prominently in the pages of the WSJ and FT.”
Lehman has probably been this leveraged for a decade. This was a finance bank. It’s not that the leverage itself was so bad (the FDIC, for example, the “rock” that is going to save our banking system, has $50 billion in assets covering $4 trillion in deposits). It’s that they didn’t know the market value of their debt.
on September 18th, 2008 at 3:45 pm
Stuart said: “In that case, oddly enough, it was Democrats who wanted “deregulation” — or, rather, continued non-regulation. In any event, I suppose Mr. Boudway could use this as evidence to support his claim that “deregulation” is responsible.”
It would be interesting to know what the Democrats had in mind, but I doubt that the two authors would be the ones to ask. It would even be more interesting to know why the Republican dominated Congress didn’t just push this through if it really what Bush wanted since they did with so much else. Could it be that he didn’t really want it?
on September 18th, 2008 at 5:35 pm
“And we weren’t risk advese; we were a commodity trading company”
I know exactly what you mean … but on one level, this is a very funny statement :-). I.e. commodities markets provide hedging and risk attenuation – if you’re so inclined :-). FWIW, I was in the biz, sort of, in the ’80’s (Heinold Commodities – long gone, but they were big back then, when you could be big by being in meats and currencies).
“This is what I meant. However, this can ONLY be done via regulation.”
Completely agree. However, we should also be alert to the possibility that regulation is not always an unmixed blessing. That was part of my original point – there is a cost in terms of profitability, growth and market efficiency whenever there is regulation. Nevertheless, it’s necessary. Beyond all that, there is also the possibility that regulation can be poorly written or executed, capricious and/or politically motivated.
“Jim, the entire American business structure is set around quarters. We are famous in the world for pursuing short term profits; so much so that it is considered a national characteristic of ours by the rest of the business world.”
I agree that this is how much of business works; but disagree that the “entire American business structure is set” around this practice. This is precisely what boards are for: to mitigate this sort of short-term, irresponsible behavior.
When what happened to Lehman Bros. and AIG happens, whatever other circumstances are present, it’s ALWAYS a governance failure. Accountants, lawyers and experienced business people are invited to sit on boards because they are supposed to recognize the warning signs and provide guidance – and, when warranted, withhold their approval and even mandate changes.
“It’s not that the leverage itself was so bad … It’s that they didn’t know the market value of their debt.”
That’s even worse.
on September 18th, 2008 at 6:22 pm
So here’s my question, then: If firms like Bear and Lehman weren’t able to figure out how to properly value their debt — despite the multi-billion dollar incentive that they had to avoid blowing up — what exactly is the government regulation that could have provided them with that (perhaps immeasurable) information?
on September 18th, 2008 at 9:18 pm
This may be too non-partisan for some like the Atlantic essay, but I found this quite interesting:
http://www.marketwatch.com/news/story/obama-says-mccain-just-doesnt/story.aspx?guid={AA1A280D-3AC9-4A88-B049-55A1F0BEB981}
on September 19th, 2008 at 6:18 am
Jim said: “I agree that this is how much of business works; but disagree that the “entire American business structure is set” around this practice. This is precisely what boards are for: to mitigate this sort of short-term, irresponsible behavior.”
When what happened to Lehman Bros. and AIG happens, whatever other circumstances are present, it’s ALWAYS a governance failure. Accountants, lawyers and experienced business people are invited to sit on boards because they are supposed to recognize the warning signs and provide guidance – and, when warranted, withhold their approval and even mandate changes.”
The nature of board governance would be an interesting topic of its own, if we were ever able to get a non-political thread going about our economic system. Yes, they are ultimately responsible for what happens to a company. But I don’t think that in general, unless there has been some sort of massive failure in the company’s past, that boards are really chosen for their expertise. And in the last 20 or 30 years, since it became common practice to include corporate management on the boards that are supposedly overseeing them (in order, it is theorized, to make corporate management “more involved” in the fate of the company) a very important control has been lost. (Perhaps the last important control, since direct shareholder participation is almost impossible.)
The reason that the large publicly traded orient themselves to quarters is the stock market. Everything hinges upon the earnings release. Now that we have suffered through a major national options scandal and companies are giving options with longer vesting periods to their executives, this might change. But most large companies live for the stock results and it is a rare one that will tolerate a decline for a year or two in order to retool or discount to take market share (something that, for example, Japanese companies do all the time).
The boards of the companies that have failed (and of those who are about to) banked everything on the idea that while what they were doing was risky, everyone was doing it and I think they believed that a meltdown would be so systemic and so large that in the end it would not be allowed to happen. In this context, they were sort of like a first class passenger who wanted to be the last person on the last lifeboat and in the meantime wanted to finish his cigar and brandy. In other words, people knew that this could happen (we were speculating about what could cause this kind of meltdown in 1996, but we already knew what it would look like when it did happen). They just didn’t want to be the first man in the lifeboat while everyone else still got to drink the brandy and smoke the cigars for another quarter or two.
I guess I would ask you here what you think the personal risks for the board members or the executives amount to. Adam Smith predicated his system of the “invisible hand” on the idea that capitalists take personal risks with their personal assets. Since the creation of the joint stock company (the corporation) it is the company (i.e. the shareholders) that are really taking the risk and the “invisible hand” moved into the world of fantasy. Do you think that a single board member is going to become impoverished? Will any be arrested? Even disgraced? Most board members of large companies both sit on other boards and are executives in their own rights. Do you think a single one is going to have to resign their own executive positions (if they are not in the failed companies) just because they sat on the board of a failed company? Do you think we will see any executives this winter living under a viaduct or having their homes foreclosed?
on September 19th, 2008 at 6:40 am
Stuart said: “So here’s my question, then: If firms like Bear and Lehman weren’t able to figure out how to properly value their debt — despite the multi-billion dollar incentive that they had to avoid blowing up — what exactly is the government regulation that could have provided them with that (perhaps immeasurable) information?”
If the risk was truly “immeasurable” then one could not compute the true debt to equity ratios of the companies to keep a collapse from flowing throughout the whole economic system. So the regulation would have been simple. Either the debt had to be marked to market each day or the instrument could not be traded. I heard this crap from investment bankers that these instruments were just too exotic to be properly regulated in the market as a whole, but they somehow seemed to be able to value them individually when they were trying to sell them to me. Regulations you cited make an assumption that the instruments could be values (otherwise how could one prove fraud?) but no one seems to have checked to see if in fact they could be. Or I should say, since it was common knowledge that they couldn’t be, what the regulations were, were a CYA for commercial banks that wanted to speculate in this way.
It’s too bad that this thing collapsed during Bush’s watch. I don’t necessarily think that the sitting president should take the blame for things like this. For example, it wasn’t Bush’s fault that the stock bubble collapsed on his watch. But although the piggies at the trough were both Republicans and Democrats (and in big business it is hard to tell them apart, really) there were two reasons they this one belongs to Bush… and McCain. First, the GOP has long pushed for deregulation not only as a policy but as a philosophy. I think we can all say that when a Republican president has to nationalize large financial institutions (we would call this “socialize” if the Russians or even the Brits were doing it), then their whole philosophy is wrong. Second, while people are acting surprised about all of this, we have known that this was coming for some time now. We have known that there was a housing bubble for years. We knew that it would have to burst. We have known for some time that mortgage lenders were taking on bad risk. We knew that this risk was being securitized. We knew that these securities had entered the OTC security market. We knew that we could not evaluate how much was out there or even where the debt was. We knew that this market was unregulated in terms of the assessment of risk. All of this has been known and publicly known. All of this was already known when the GOP ran the House and Senate. And Bush could have started to head this off through his control of the regulatory agencies. But he didn’t.