Reconsidering regulation
Several factors contributed to the 2008 financial meltdown, but one of the main culprits may have been regulation, or lack thereof. Kai Ryssdal speaks with Steve Henn about the deregulatory trend and the push for more regulation that is expected to come.
U.S. Capitol Building (Paul J. Richards/AFP/Getty Images)
More on The Economy, America's Financial Crisis
TEXT OF INTERVIEW
Kai Ryssdal: It's not that the financial crisis came to pass because there were no rules on Wall Street. It's that people -- both in Washington and on Wall Street -- decided the rules didn't always apply. With the new Congress sure to consider fresh regulations for the financial industry, and soon too, we've asked Marketplace's Steven Henn to recap what got us to this point.
Hey Steve.
Steve Henn: Hey.
Ryssdal: Amid all the finger pointing going on here, and there is plenty of it, one thing that comes up a lot is regulation, or the lack thereof. Give us a quick history lesson on how those rules got so lax.
Henn: You know, Joseph Stiglitz, the liberal Nobel Prize winning economist, says this all started back when Alan Greenspan was appointed to head up the Federal Reserve in the '80s. Greenspan is, or at least was, a Libertarian -- and for bankers, that was a little bit like having the chief regulator being a babysitter who lets you eat ice cream straight from the carton and jump on your parents' bed. But the thing is, really, this goes much beyond Greenspan's tenure at the Fed -- he was just part of a much bigger trend. If you look back at decisions made in Congress or by the Clinton administration or at the SEC over the last 20 years, you know, Greenspan was just part of a deregulatory trend that reined regulators in consistently.
Ryssdal: Give us a couple of examples of specifics during that trend, though.
Henn: Well, there are a couple of big things. I mean, one of the most prominent was the repeal of the Glass-Stiegel Act in 1999. This was that Depression-era law that kept investment banks separate from commercial banks. The idea behind that law when it was passed, you know, 70 years ago, was that if you let these two types of banking institutions get together, they'd take risks that were too big and there would be all sorts of conflicts of interest. And frankly, since the repeal of Glass-Stiegel we've seen some of those problems occur. But there were also hundreds of smaller decisions that didn't get a lot of attention at the time that, looking back on it now, played a big role in leading into the mess that we're in. For example, in 2004 the SEC passed a rule that let investment banks dramatically increase their leverage. In retrospect, that looks like a really bad idea.
Ryssdal: And the point here being that this regulation, or move toward deregulation, comes across presidential administrations in both parties.
Henn: Yeah. Absolutely. I mean, it was President Clinton who declared the era of big government is over. And part of that was, you know, really sending a message that the government should have a light touch when it comes to the markets.
Ryssdal: You know this whole period has the feeling a little bit like right after Enron, when you knew Congress was working up some new rules and regulations. Where do you see that going as Congress comes back after the holidays?
Henn: Well, I think one of the first things that's going to happen, and is already happening, is there's going to be a lot more pressure on regulators to enforce the rules we already have. But there's also going to be a push to rewrite some of the rules governing the financial industry. I mean, right now we have this incredibly fragmented system for banking regulation. You know, it's an alphabet soup. There's the OTS, the OCC, the SEC, the Fed. You know, this has created lots of cracks, and bankers can sort of shop around for the regulator with the lightest touch. I think one of the first things that's going to happen is that Congress is going to look hard at creating, sort of, one big regulator that's in charge of overseeing the entire system and its primary purpose will be to look out for big, systematic risks. You know, Congressman Frank says that he wants this regulator to rein in excessive risk taking, and it's going to look at everything from hedge funds to investment banks to commercial banks.
Ryssdal: Congress is not the swiftest of beasts though, even in the best of times. How long is it going to take to see some of these new rules?
Henn: Well, Frank says he wants to get it all done by summer but, you know, we'll have to wait and see. I'm sure the banking industry and their lobbyists here in Washington will have a lot to say about all of this, and I don't expect that they're just going to sort of tip-toe quietly into the night.
Ryssdal: Marketplace's Steve Henn in Washington. Thanks a lot, Steve.
Henn: Thank you.
Comments
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From huntington beach, CA, 01/05/2009
I'd like to see some reporting on the abuses and possibly illegal activity which occurred and contributed to this economic crisis. A year before Countrywide Financial went under, I met a friend of a friend who worked in the bond office there. I was talking to him about the real estate bubble. He told me that there was more to things than just prices. He predicted that there was going to be a huge financial crisis. He said it was going to take out some of the largest financial companies. At the time I didn't know what to make of his comments.
Its obvious that if a low level employee was able to see what was really going on, that company executives and regulators should have been able to see this also. My impression is that many people were trying to make as much as they could before the collapse.
Was there illegal activity? It would be nice to start to hear some reporting on the investigations and what people knew.
From Princton, NJ, 01/04/2009
Lstening to, and reading the trascript of this story, I am struck by the continued assumption that the lack of regulation is the cause of this recession. Additionally, there is little evidence, other than hyperbole, offered to support the case. The repeal of Glass-Stiegel is a stretch, especially since it was passed almost 10 years ago.
Increasing leverage is not an example of deregulation. Rather, there has been a virtually consistent increase in regulation as measured by pages in the Code of Federal Regulations (Forbes, 11/29/08, pg. 44). If Marketplace is going to further this contention, let's get some more substantve evidence.
Rather, we should be hearing about how Federal interfeence in the market, such as the Federal Reserve maintaining a loose monetary policy in the early 2000's led to real estate speculation an the excessive use of leverage. Allowing rates to rise would have reduced, or eliminated both of these practices. Likewise, let's hear more about how Congress influenced Fannie Mae & Freddie Mac's lending standards.
From Washington, DC, 01/03/2009
Sorry! Quantitative Easing Won't Work
In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.
Hence, the Keynesian paradigm I = S is not verified.
The purpose of Quantitative Easing being to lower the yield on long-term savings it doesn't create $1 of investment.
It does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on savings.
This and other issues are explored in my tract:
A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order
Abstract:
This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.
It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.
It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...
It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.
A Credit Free, Free Market Economy will correct all of those dysfunctions.
The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.
A Specific Application of Employment, Interest and Money
http://www.17-76.net/interest.html
From GA, 01/02/2009
Thanks to Phillip Michaels before me for pointing out Mr. Henn's age as well as his lack of knowledge re: DEregulation origins w/in this generation,those of us who have and are living with the knowledge and as well as through,and in spite of,others' mistakes. The Clinton admin covered 1993 to 2000. Try as you may,history will not attribute the current economic situation to the Clinton admin. The yesrs referred to, as my "history" reminds me(and I am 50yo and not 12) were yesrs of Bush admins. and Reaganomics was basically the 'era of deregulation.'Please let have the facts before placing blame and at least get someone who knows their information or a host who can let them know it.
From San Diego, CA, 01/02/2009
What happened to David from Texas that used to be on Friday Marketplace? I miss him.
From University City, MO, 01/02/2009
Mr. Henn must be about 12. His report on re-regulating the financial industry largely only pointed at President Clinton as responsible for the failure to regulate. He must not have been born yet to forget that the Republicans retook control of Executive branch and the Congress in the '80s by preaching that the best government was no government. He also apparently doesn't know that the Republicans controlled the Congress and the agenda for most of the Clinton years and that much of Clinton's posturing during that time was driven by efforts to work with the Congress. Even if he is 12, why doesn't he mention how the Republican belief in no government colored the last eight years when they controlled the executive, the Congress, and the agenda nearly all the time? His report doesn't say "Republican agenda" once. If he can't actually claim to be 12, how did he miss the elephant in this broom closet?
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