Dale Tavris -- World News Trust
Mar. 7, 2011 -- Those who say that banks don’t need to be regulated by government are either naïve, sucking up to rich and powerful bankers, or hoping that the absence of regulations will enable them to game the system for their own private profit.
The quote that is the title of this post, "I Don’t Think There Is Any Need for a Law against Fraud," was spoken by former Chairman of the Federal Reserve, Alan Greenspan. The quote itself would be no big deal, except for the fact that Greenspan and his fellow like-minded Wall Street moguls had the power to make that philosophy the predominant economic policy of the United States of America over the years leading up to the worst economic crisis since the Great Depression.
Greenspan’s antipathy to laws against fraud was also evident in his testimony to Congress, as when he argued against the need to regulate “over the counter derivatives” (OTCs), an extremely complex "financial instrument," in the public interest:
"Risks in financial markets, including derivatives markets, are being regulated by private parties. There is nothing involved in federal regulation per se which makes it superior to market regulation."
Why would anyone be against a law to combat financial fraud?
What would engender such a philosophy? Well, there are two answers to that question: 1) the answer given by Wall Street to justify their actions, and; 2) what many believe to be the real answer.
I believe that the real answer was captured in a 2009 New York Times editorial:
"During the bubble, Goldman Sachs and other financial firms created complicated mortgage-related investments, sold them to clients and then placed bets that those investments would decline in value.” The practice ... allowed Wall Street to profit handsomely as its clients tanked. It also exemplified the financial meltdown, spreading the losses to pretty much everyone...."
In other words, fraud in the form of a complex financial instrument that almost nobody could understand.
Then there is the common justification for the elimination of laws meant to prevent powerful financial institutions from perpetuating fraud on the American people. This is described in an article by Michael Schroeder, commenting upon the reaction of Alan Greenspan, Robert Rubin, and others to the idea proposed by the former head of the Commodity Futures Trading Commission, Brooksley Born, to the effect that OTC derivatives needed to be regulated:
"Born’s comments ... about the need for more oversight and regulation of the OTC derivatives triggered an uproar among derivatives dealers -- from JP Morgan to Enron. They quickly complained to Congress and other regulators that the uncertainty Ms. Born was creating could destabilize their markets."
Let me comment on the desperate concern of Greenspan and others about the dangers of “uncertainty” in financial markets. Ponzi schemes, such as the one cooked up by Bernard Madoff, run a real risk that “uncertainty” regarding their schemes will repel potential suckers from buying into them. A large and legitimate system, on the other hand, such as the economic system of a superpower nation, should not have to depend upon eliminating uncertainty. A legitimate system should stand on its own merits and results, without the need for propaganda or infusions of taxpayer money. Matt Taibbi, in his book, “Griftopia -- Bubble Machines, Vampire Squids, and the Long Con that Is Breaking America”, explains how Alan Greenspan completely missed this obvious point. In a chapter titled “The Biggest Asshole in the Universe,” Taibbi explains the inappropriateness of “restoring confidence” in this way:
"If the national economy is a casino and the financial services industry is turning one market after another into a Ponzi scheme, then frantically pumping new money into such a destructive system is madness, no different from lending money to wild-eyed gambling addicts ... and that’s exactly what Alan Greenspan did, over and over again."
Some background to our current economic crisis
The Great Depression of the 1930s, following the Stock Market Crash of 1929, was very similar in important respects to our current crisis. In both cases, the financial crisis occurred in the midst of record-breaking income inequality and in the presence of an unregulated, out-of-control financial industry. President Roosevelt, inaugurated in 1931, recognized the role of the financial industry in causing the depression, so he consequently led in the creation of financial regulations meant to prevent repeat occurrences of economic crises.
Chief among those regulations was the Glass-Steagall Act, which provided for the separation of commercial banks and investment banks. The rationale for this law was that commercial banks should serve as a safe place for people to put their money. If bankers are allowed to gamble that money, then our savings are put at risk. Furthermore, the authors of Glass-Steagall recognized that unprincipled big bankers, in the absence of regulation, could game the system to their own advantage: They could gamble our money in a quest for large profits. If they win, then great. They keep the profits, and the public’s money is safe. If they lose, they request and probably receive a bailout from the federal government at taxpayer expense, on the rationale that they are “too big to fail” -- meaning that their failure will ruin the nation’s economy. It’s a win-win situation for the banks.
The financial regulations passed during FDR’s administration served us very well for six decades. But by then there were few people alive who remembered the Great Depression, and most Americans were not very well educated about its causes.
The repeal of Glass-Steagall
So financial titans such as Alan Greenspan and former Secretaries of the Treasury in the Clinton administration, Robert Rubin and Larry Summers, along with several Republican leaders, chief among them Senator Phil Graham, began pressing for deregulation of the financial industry. Robert Scheer discusses the sequence of events in his book, “The Great American Stickup -- How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street.” The first big landmark victory for Wall Street was the repeal of Glass-Steagall. Scheer notes:
"The new law replacing Glass-Steagall would be called the Financial Services Modernization Act. Upon signing the first measure, President Clinton seemed giddy with excitement over just how modern all this was, even as it pushed aside key achievements of the most celebrated president -- Franklin Delano Roosevelt -- his party had ever produced."
Nobel Prize-winning economist Joseph Stiglitz has commented on the significance of the repeal of Glass-Steagall:
"Repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money -- people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment bank culture came out on top. There was a demand for the kind of returns that could be obtained only through high leverage and big risk-taking."
The Commodity Futures Modernization Act of 2000
The next step was to deregulate the derivatives markets. Scheer explains the legislation and what happened:
"(Larry) Summers ... successfully presented the case for a ‘See no evil’ policy on derivatives before the Senate on July 30, 1998 … Summers said, “In our view, the Release (of a critical report by Brooksley Born) has cast the shadow of regulatory uncertainty over an otherwise thriving market ... We believe it is quite important that the doubts be eliminated....” The legislation (Commodity Futures Modernization Act of 2000) also successfully divorced the granters of subprime mortgage loans from any obligation to ever collect them.... Greenspan’s fantasy had come true; the government was washing its hands of financial regulation.... In less than a decade they would cannibalize themselves in an accelerated rush of high stakes gambling, destroying $14 trillion of the wealth of American families."
The great bailout
As our more astute economists predicted, deregulation of the financial industry led to a near collapse of our national economic system and a severe financial crisis that is still with us today, several years later. But Wall Street came out of it just fine, thanks to a multi-trillion-dollar taxpayer bailout. Scheer explains how that process worked for the benefit of Wall Street, especially for Goldman Sachs:
"As (Treasury Secretary) Paulson moved to take over the U.S. Treasury Department, he would bring with him the very same 'experts' whose financial follies had risked Goldman's future.... Paulson used the banking crisis as a justification for quickly putting Goldman employees and alums in charge of key outposts concerning the bailout ... which benefited Goldman enormously.
"What we have here is a rare glimpse into the workings of the billionaires’ club, that elite gang of perfectly legal loan sharks who in only the most egregious cases will be judged as criminals.... These amoral sharks, who confiscated billions from shareholders and the 401(k) accounts of innocent victims, were rewarded handsomely, rarely needing to break the laws their lobbyists had purchased....
"In September 2008 came his (Paulson’s) infamous three-page, take-it-or-leave-it proposal to Congress that the government fork over $700 billion in bailout funds, and he was successful in insisting that no strings be attached in the form of punishment for CEOs, oversight or control on bonuses.... Basically, they gave Congress a ransom note: “We’ve got your 401(k) and if you want to see your 401(k) alive again, give us $700 billion in unmarked bills.” The threat worked, and the bailout intrusion into the ostensibly free market of a scope unprecedented in U.S. history passed by a wide margin in Congress, with few questions asked....
Some very basic principles we need to keep in mind
There are some very basic principles in play here -- principles that go well beyond the specifics of national economic policy. Most basic of all is the hypocrisy involved in the fact that we call ourselves a democracy, and yet the influence of money has for so long drowned out the influence of ordinary American citizens that most of us just accept it as a matter of course. Scheer gets to the heart of the matter with his comments on the influence of corporate lobbyists on what is supposed to be our government:
"I found that congressional representatives or their staffers would often respond to my questions by helpfully referring me to lobbyists who they conceded knew a great deal more about the subject than those actually paid by taxpayers to represent the public interest. That these staffers could do so without embarrassment speaks enormously to the incestuous arrangements of our political process. Not only are these lobbyists seen as 'experts' on Capitol Hill, rather than simply corporate mercenaries using cash to buy laws and access, but they are treated with a palpable respect, as are the corporate executives who often accompany them.... They are received as admired insiders, a resource to be milked for knowledge and campaign contributions. Their presence unchallenged and unquestioned, they tromp up and down the halls of power, writing laws, killing bills, and generally putting the lie to the fantasy of a government 'of the people, by the people, for the people.'"
The other very basic principle is a related one -- a principle that perhaps goes far towards explaining the “respectability” of those who throw their country into a severe economic crisis and then escape with obscene sums of money for their efforts, with no accountability for their deeds. I love Scheer’s comment on this:
"The word 'dole' is usually applied pejoratively to welfare mothers sustained in their dire poverty by meager government handouts, not to top bankers ripping off the taxpayers. But as opposed to welfare mothers, who must survive stringent monitoring, the bankers would be largely self-monitoring. Under Obama as with Bush and Clinton before him, there was to be tough love for welfare mothers but never for bankers."
We as a nation should think a lot more about this. The inconsistent standards that we apply to banksters vs. the poor is shameful. The one robs us of our futures, while the other gets most of the blame and scorn.
Sucking up to bankers
The last chapter in Scheer’s book, in which he summarizes and puts into perspective our whole sorry financial mess, is aptly titled “Sucking up to bankers.” Here are some of the main points:
"The Wall Street bailouts were a frantic response to a crisis that resulted from the radical deregulation pushed by former Goldman Sachs honcho Robert Rubin when he was President Clinton’s treasury secretary. Another Goldman Sachs chair-turned-Treasury-secretary, Henry Paulson, in the Bush administration, designed what became the more than $1 trillion bank bailout that will go down as the greatest swindle in U.S. history.
"Where did the money go? It took major pressure from a Congress reacting to an outraged public to discover that AIG, in addition to handing out hundreds of millions in bonuses to the very hustlers who created the firm’s swindles, was a conduit for at least $70 billion in taxpayer money to reimburse the banks and stockbrokers who got us into this crisis.... Those orchestrating the bailout and those grabbing the money are for the most part friends and former colleagues, with enormous respect for each other but not for the American taxpayers and homeowners experiencing massive foreclosure rates....
"Treasury Department’s special inspector, Neil M. Barofsky, charged that the TARP program from its inception was designed to trust the Wall Street recipients of the bailout funds to act responsibly on their own, without accountability to the government that gave them the money.... As with the entire banking bailout, the new Obama plan was likely to enrich the very folks who impoverished the rest of us, as the report notes ... 'Once again, the taxpayer takes a significant loss while others profit.'
"At the heart of this potentially massive fraud was the original decision of Treasury Secretary Paulson to not require the recipients of the bailout, such as his old firm, Goldman Sachs, to account for how the money was spent. Unfortunately, President Obama’s administration continued that practice. The only difference is that the amount of public money being put at risk was now far greater....
"The dispiriting lesson of both the Clinton and the Obama White Houses is that the Democrats proved to be as eager to please Wall Street as their Republican rivals. The influence of big corporate money far overwhelms that of labor, environmental, consumer, or grassroots organizations, making a mockery of the American ideal of self-government when it comes to reining in the antics of the largest conglomerates of wealth."
Lastly, I would like to go back to the title of this post. When a high government official tells Congress that we don’t need laws to prevent fraud -- in other words, that we should trust big corporations to police themselves -- we should be very suspicious of such advice. Do we ever hear anyone say that we don’t need police in our neighborhoods because the American people can police themselves? Of course not! Then why should we consider letting corporations police themselves? The bottom line is that people who tell us that banks don’t need to be regulated by government are either astonishingly naïve, are merely attempting to suck up to rich and powerful bankers, or are hoping that the absence of regulations will allow them to game the system for their own private profit.