I have to start today’s post with a serious “great work!” to the folks in Washington. The action they’ve taken last week to stabilize the financial markets — and work on the real problems in the financial system — deserve some serious praise. This isn’t the end of the financial crisis by any means, but the White House and others have clearly made serious inroads. We’re all better for it.
You have to wonder what the real story is behind this. Perhaps a late night call from Saudi Arabia or China saying, “you want us to dump all our bonds tomorrow?” had something to do with the speed and magnitude of the change. Treasury Secretary Paulson, SEC Secretary Cox, and Fed Chairman Bernanke have pivoted on this issue so fast, they’ve got to be suffering whiplash. It’s great to hear McCain simultaneously calling for stronger banking regulation but fewer regulations — as a marketer, it just makes makes my heart flutter and my eyes tear up at such double-barreled bullshit.
All of a sudden, regulations are being brought to bear. This is a huge turnabout, as Republicans have traditionally been ardent proponents of laissez faire capitalism and aggressive deregulation. Particularly with Cox and Greenspan, who essentially told their regulatory agencies to do less. The market knows best, corrects itself, and — through the automatic punishment of bankruptcy — weeds out bad behavior. So over the last dozen years or so, legal safeguards, firewalls, and regulations of the banking and investment industry were swept away. In 2000, Congressional Republicans made hedge funds almost completely free of inspection, let alone oversight or regulation.
Some companies made a ton of dough with this — a few hedge-fund managers compensated in the billions — and leverage was driven to the hilt. In a classic case of what economists call a “race to the bottom,” safeguards were removed or ignored. Oh yeah, and common sense was thrown out the window. If you weren’t playing the game by the new rules (where there were no rules of credit-worthiness), your firm would lose out. Check out PlanetMoney’s terrific podcast about how the sub-prime mess really happened.
So what did those deregulated companies do? Privatize huge profits. And now what do WE get to do? Nationalize the losses. To the tune of $1.5 trillion so far (that’s $1,500,000,000,000). This all goes to the national debt, which we’re going to have to pay back someday….could be sooner than you think, given the country’s overall creditworthiness.
Deregulation has been sooooooooooo good for us.
Remember the Savings and Loan crisis of the early 90’s? Pretty much a direct result of the S&L deregulation of the early 80’s. Taxpayers paid $150 Bil so that bankers could have a field day “innovating” and “competing.” In other words, speculating. Remember Keating? He was big buds with McCain.
Remember when the Republicans deregulated the California electric power system? Within months, PG&E and SoCal Edison sold off all their generating plants to others, because for the first time in 80 years they didn’t have to do what regulators said anymore. These power companies would be soooooooooo much more profitable if they didn’t have to actually generate power! Grrrrreat for stockholders! Cool for bondholders! And power would be cheaper because they could just buy it in a competitive marketplace (you know, the one that never hurts any customers!). And it became soooooooooooo much fun for Enron and Dynergy to manipulate prices, arbitrarily turning off power plants to underscore the point that they could make more money by hurting businesses and people than by delivering power. There are some great recordings of Enron traders joking about increasing the cost of power by 10 times. Deregulation was their corrupt meal-ticket.
The final irony: companies without regulation hurt themselves, as well as each other. In the end Enron blew up and Dynergy was financially crippled.
There’s a striking parallel with what happened to the Wall Street geniuses when they were freed from their shackles, given regulatory holidays and supplied with cheap credit. If the government hadn’t intervened this week, every big independent investment bank would have been put out of business (3 out of 5 were already gone). The retail banks like WaMu, Wachovia, Downey Savings, and hundreds of others would have come under further attack. To paraphrase a bunch of articles in the Wall Street Journal and the London Financial Times, the financial system would have totally melted down.
All this in the name of deregulation. To quote MarketWatch, “a free market is anything but free when taxpayers are left holding the bag.”
WiseUP! Regulations are put in for a reason. In many situations markets do not self-correct. As we’ve just witnessed, unbridled markets even exaggerate dangerous situations. Regulations can be bad, but sometimes deregulation can be even worse. Don’t swallow the “get the government out of the way of business” garbage…unless you’d like to pull out another trillion dollars from your wallet.
