To Regulate Or Not To Regulate: That is the Question

To Regulate Or Not To Regulate: That is the Question

The Big 8 are meeting next month in Italy to discuss global financial regulations. Is it just me or is it ironic that Italian Prime Minister Silvio Berlusconi is hosting an economic regulatory summit based on free market principles? Italy may be a “democracy,” yet the PM holds a monopoly over Italian media (print, radio and TV), and has often been accused of unduly influencing elections (his own) and manipulating regulatory structures to suits his private business needs…

Oh well, America has had its share of monopolies, tainted elections and lax regulatory oversight in its recent past.  Judge Not, Lest Ye Be Judged…

Meanwhile, back at the Ranch (Washington, D.C.), financial institution regulatory changes take center stage.  The Battle between Oversight Agencies begins.

Firstly, kudos to President Obama for not pushing the issue of regulatory oversight under the rug. We all know that previous administrations (thou shalt be nameless) would have done so at the first opportune moment. Thankfully, not this one.

Yet further ironies abound.  One of the biggest issues facing our nation’s regulatory system going forward stems from the fact that two of the key guys that pulled back the onion skin on financial regulation over the past decade (Summers and Geithner) are the ones creating the new regulatory template….! ? Okay that is not a question; it is a fact. Bizarre as that might be.

 In 1999, referring to the repeal of sixty plus years of banking regulations, Summers said,  ”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century. This historic legislation will better enable American companies to compete in the new economy.” Well, he was “spot on” about one thing, that legislation (Gramm-Leach-Bliley Act) was indeed historic. It enabled the formerly conservative banking industry to fully participate in mortgage-backed securities, credit debt obligations, and credit default swaps. The history-making agenda swept aside all rational reason and transformed boring banking to rape and pillage of the U.S. and global financial institutions. We have been here before haven’t we? 1987, 1929, 1907, 1893, 1873…yada yada.

New York Times journalist Stephen Labaton reported in November 1999, “The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation’s financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.”

These remarkable quotes reveal how out of step Summers and the overwhelming majority of lawmakers and policy makers were with financial markets realities. What makes us think these “experts” are more cognizant of the inner workings of human financial behavior today than they were ten years ago? Deregulatory cheerleader Summers has not once acknowledged his errors in judgment from his fateful tenure at the Treasury under Clinton. Therefore, it is fair to surmise he doesn’t believe he made any errors. Why did Obama not choose one of “the handful of dissenters” with the vision to foresee disaster if the money reins were unleashed without restraint?

Treasury Tim and former mentor, Summers, want the Federal Reserve Bank to control banking oversight. Let’s think back to the former Fed Chief, Alan Greenspan, circa 2005. “The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions …. Derivatives have permitted the unbundling of financial risks.”

Indeed it was very sophisticated–that approach to “measuring and managing risk.” What was it again, Take the Money and Run? Wow, that was actually an official Fed policy? I thought it was a Woody Allen movie.

While current Fed Chair Bernanke is a significant improvement over his laissez-faire predecessor, he did not see the train wreck on the horizon either. So much for Federal Reserve oversight authority. It seems “irrationally exuberant” to borrow Greenspan’s own words, to leave such great authority in the hands of those who can misuse it so well.

Other “oversight” agencies were equally incapable of preventing the financial system’s collapse…Securities and Exchange Commission (SEC), Office of Thrift Supervision, Commodities Futures Trade Commission (CFTC),Office of the Comptroller of Currency (OCC), (betcha you never heard of any of these), and our old favorite Federal Deposit Insurance Corporation (FDIC).

All this you may or may not know already. The issue at hand really is how do we integrate this thick alphabet soup of official regulation to serve the ordinary citizen?

Summers and Geithner want an uber-oversight “Council” of regulators at the very tippy top of the lop-sided oversight pyramid.

Would this “Council” be made up of ideologues like Summers, Geithner, and Greenspan? Or would this “Council” be served by investment bankers themselves like the Federal Reserve System and the Securities and Exchange Commission?

I mean—should investment bankers really be allowed to protect investors from investment bankers? That seems to have gone very badly in recent months.

President Obama and his boys have proposed a much-needed consumer oversight committee to supervise mortgage products and other consumer credit products vital to American life much like a Food and Drug Administration for Finance—a wonderful and long overdue concept.

Yet the problem of oversight of the banking industry still remains. Jockeying for position among the power hungry throng of bankers and policy makers who are often one and the same is the game in DC these days.  The major issue at hand is nothing less than “national economic security.”

What would best serve the public good and secure our banking system to insure national banking stability?

Nothing that has gone on in the last decade seems to fit the bill for the future.  A “Council” is a scary concept in the wrong hands, especially one created by peel-back-the onion ideologues. Inevitably it will look like all the other regulatory agencies, staffed by ex-bankers, banker wannabes, or banker buds looking to safeguard their own interests.

If it is really made for consumers’ safety and citizen economic security, then let citizens have a direct say in the policy. The alleged “free market” ideology of the last decade has been revealed as resembling more of an economic anarchy than any recognizable form of democracy.

In our New Economy, the one that serves all the people, democracy is the rule. Take some (not all) of the money strings out of the hands of self-interested bankers and move these into the hands of citizen advocates. Ralph Nader isn’t looking so outdated after all. Obama and Team need to create not only a consumer oversight council, but a Citizen Consumer Council made of actual consumers, not politicians or bankers. Policy makers are often out-of-touch with real life issues. Perhaps this council will not have legislative power, but will have consumer protection power, a voice for public concerns that will be heard and not dismissed.

With the notable exception of the FDIC, the official agencies named above, to a large degree over the last ten years, have forgotten, neglected, or just plain ignored any commitment to public service. Instead they have operated from an allegiance to what can only be called “banking service.” This reality is not due to some ugly Machiavellian plot; rather it is simply a function of those in charge serving their own interests. Let’s balance the scales and add the interest of the other 95% of the population. Those at the top will not lose their wealth. The system will simply circulate the wealth more efficiently through all levels, so everyone can flourish.

The moment in our history has arrived for all men and women who are created with equal opportunity under American constitutional law to be directly represented in the New Economy where we are building, rather than attempting to fix an archaic, unfixable, and anarchic system. Citizens and consumers not only deserve a direct voice in these regulatory boards, but are entitled to influence issues of economy that directly impact their existence—right where they live.

We can view the continuing breakdown in our economic system as a moment to despair or we can use it as an opportunity to transform the unwieldy status quo and create a New Economy worthy of the 21st century. One that includes you, me, and a community of citizens who care about a world that works for all of us, not just a few.

It’s time our voices should be heard.