Wall Street Regulation

Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren… The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Part 4 of the Special “Off The Reservation” Election Series in the Long Island Press.

The Banking Act of 1933, commonly known as Glass-Steagall, was established to tame the harmful speculative behavior of an industry run amok in the early part of the 20th century; behavior many observers at the time credited for the market crash that precipitated the Great Depression. For some, the repeal of Glass-Steagall, by the Gramm-Leach-Bliley Act of 1999, was the deathblow to financial prudence on Wall Street.

 In reality it was simply the formal recognition of careless financial practices that were largely in place already. Since the near-collapse of the banking industry in 2008, Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren, the former federal consumer protection advocate now running for Senate in Massachusetts. The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Wall Street reform is as important as it was in 2008 but both President Obama and Gov. Mitt Romney have taken great pains to avoid talking about it too much. For his part, President Obama seems content to rest on the laurels of the Dodd-Frank Act, Congress’s attempt to rein in Wall Street excess, which had enough support to pass but not enough to be properly funded or enforced. According to Romney’s platform, he would “Repeal Dodd-Frank and replace with streamlined, modern regulatory framework.” That’s the extent of his vision for the future of Wall Street according his platform. Ten words.

So while the rest of the country is suddenly talking about a law enacted almost 80 years ago, these guys aren’t going anywhere near it. The truth is, Wall Street reform and, more specifically Glass-Steagall, is more complicated, making it easy for Obama and Romney to be evasive.

So let’s answer two questions. What would actual Wall Street reform look like and what exactly was Glass-Steagall?

The purpose of the original act was to establish a barrier between traditional banks and the risk-taking investment firms, denying investment banks access to consumer deposits and secure, interest-bearing loans. The unwritten effect of Glass-Steagall, however, was to establish a culture of prudency in the consumer and business banking realm, leaving sophisticated professional investments to more savvy financiers who had the ability to calculate the inherent risk of a financial instrument. For decades to follow, the merits of Glass-Steagall would continue to be debated, but it nevertheless drew a marked distinction between the function of a consumer bank and an investment bank.

Today reinstating Glass-Steagall is a common rallying cry among those who decry the bad behavior of Wall Street. Its repeal has become the fulcrum of nearly every debate surrounding deregulation. Actually accomplishing this, of course, is easier said than done.

The best way to reconcile the debate over whether to reinstate Glass-Steagall is to appreciate that the culture of Glass-Steagall was more important than the act itself. Over time the restrictions placed on bankers under the act were chipped away, but the culture that governed the banking industry endured beyond its measures. Eventually, savvy bankers and politicians found ways to loosen its screws and interpret the act to their own benefit.

Don’t Just Blame Republicans

In 1978, President Jimmy Carter oversaw the passage of the International Banking Act, a bill that should probably receive as much, if not more attention than Gramm-Leach-Bliley. Essentially, the act allowed foreign banks or entities that engaged in “banking-like activities” to participate in domestic financial markets. For the first time, foreign investment firms were able to make competitive loans so long as they didn’t compete for consumer deposits; initially individual states could determine whether their regulatory structure could support this new activity. The government would go on to loosen restrictions governing the competition for consumer deposits and allowing bank holding companies to treat money markets like checking accounts.

In his book “End This Depression Now,” economist Paul Krugman argues that perhaps the most influential step with respect to the banking sector came with Carter’s passage of the “Monetary Control Act of 1980, which ended regulations that had prevented banks from paying interest on many kinds of deposits. Unfortunately, banking is not like trucking, and the effect of deregulation was not so much to encourage efficiency as to encourage risk taking.”

 By 1987 the bank holding companies, including foreign companies allowed to operate within the U.S. banking system, were granted access to mortgages to create a package of investments called mortgage-backed securities; the threshold for the amount of investing activity in instruments such as these was also increased, paving the way for the growth of investments backed by the strength (or weakness) of the consumer market.

During that same year, members of the Federal Reserve began calling for the repeal of Glass-Steagall as then-chairman Paul Volcker was providing the tie-breaking resistance. But this was a mere formality because by this time, Glass-Steagall was effectively over.

Yet even though most of the threads of regulation had been pulled from the overcoat that protected consumers from risky banking practices, the culture of prudent banking still existed to an extent; maintaining the Glass-Steagall Act on the books was an indication of this sentiment. Throughout the decades when regulations were steadily eroding, powerful national figures such as Paul Volcker under Carter and Reagan, and Treasury Secretary Nicholas Brady under George H.W. Bush managed to temper the enthusiasm of the movement.

That George Bush Senior heeded their admonitions was an admission that the public’s appetite for deregulation was actually beginning to wane in the post-Reagan hangover. Richard Berke’s New York Times article of Dec. 11, 1988, on the eve of the Bush presidency, encapsulated this feeling. Berke wrote, “Lawmakers and analysts say the pressure is fed by a heightened public uneasiness about deregulatory shortcomings that touch the daily lives of millions of Americans: from delays at airports and strains on the air traffic control system to the presence of hazardous chemicals in the workplace to worries about the safety of money deposited in savings institutions.” Alas, these four years would prove to be a momentary hiccup in the deregulation movement.

During the Clinton years, the nation’s leadership was largely comprised of proponents of deregulation. In fact, by his second term, Clinton was almost entirely surrounded by rabid free market enthusiasts. A former chairman at Goldman Sachs, Robert Rubin, was Secretary of the Treasury, Alan Greenspan was still at the helm of the Federal Reserve and Phil Gramm was the head of the powerful Senate Banking Committee. All of these men had close ties to Wall Street and made no secret of their intention to release bankers from the burdensome shackles of regulation and oversight.

Reforming Reform

In 2008, economist Joseph Stiglitz warned of the enduring negative consequences of deregulation. At a hearing held in front of the House Committee on Financial Services, Stiglitz invoked Adam Smith saying, “Even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions was to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standards of our highly regulated financial entities.”

For emphasis he noted, “We have shown that we can do this when we want, when terrorism is the issue.”

Still, the nagging question remains as to what reform might look like. After all, not all deregulation is irresponsible. Most of the discussion in the media surrounding deregulation revolves around the concept that our banking institutions are “too big to fail.” Thus the rallying cry for reinstating Glass-Steagall and separating banks from investment banks. I’m in tepid agreement with the underlying principle, but the reality of the situation is far more complicated. The fact is banking has gone global and the deregulation genie is out of the bottle.

As I said earlier, Glass-Steagall was as much about instilling a culture of prudency to the banking world as it was about erecting a barrier between commercial banks and investment banks. Advocates like Elizabeth Warren like to say that prior to 1999 and the repeal of Glass-Steagall, the economy functioned through periods of both prosperity and recession since 1934 without the banking sector once collapsing. It’s a fair, but oversimplified assertion that overlooks the fact that Glass-Steagall was on a ventilator in 1978 and dead by 1980. A 30-year run of prosperity from 1978 to 2008, with a few brief recessions in between, is nothing to sneeze at.

Restoring balance to the banking sector does not necessarily require separating the banks. Not yet at least. It begins with transparency and reestablishing the culture of prudency that has been conspicuously absent over the past decade. After all, you cannot value what you cannot see; nor can you mitigate risk unless you first manage reward.

What this really boils down to is accountability, which is ultimately a behavioral issue. Allowing investors to actually see how a bank behaves by viewing the size and scope of their transactions would theoretically assuage their appetite for risk. Given these conclusions, it’s easier to make the case that our current president would provide more accountability and inspire behavioral changes on Wall Street, particularly given Romney’s intransigence when it comes to considering financial reform. But tough talk against Wall Street has all but disappeared from Obama’s rhetoric leaving little hope that a second term will elicit any further positive change. So this week, while neither man seems serious about financial reform, the status quo is better than further deregulation and letting bankers rule the roost.

Tie goes to the incumbent.

Women’s Intuition

When you examine the litany of geniuses who wrought havoc in the markets in their profligate quest for unmitigated deregulation, you’re hard-pressed to find the fairer sex among them.

On the 18thday of the Occupy encampment at Zuccotti Park, I paused to photograph a curious scene. An older man with a tight gray beard was leading an unlikely group in an acoustic rendition of Bob Dylan’s “Blowin’ in the Wind.” People of every age and background, from a family with young children to a construction worker, had gathered on the steps leading to the area of the park known as “The People’s Library” to join in song. The only giveaway that I hadn’t accidentally stumbled through a wrinkle in time and landed sometime in the 1960s was that nearly everyone was recording the moment with a camera phone.Midway through the song, our musical guide abruptly stopped the music to address the ragtag bunch before him. “Why are there no women in this song?” he pondered aloud, with his guitar dangling from its strap and his arms spread wide. “Because men are responsible for screwing it up.” Before continuing with the song he proclaimed, “Let’s hope there are more women in power so we can have more humane decisions.”This scene was only one of several captivating pockets of Zuccotti Park, and my attention was soon drawn elsewhere. Weeks later when reading a piece about celebrity influence in the Occupy movement, I noticed a picture similar to the one I had captured on the steps that day. As it turns out, the gentleman serenading the group was Peter Yarrow of Peter Paul and Mary fame. Two things immediately occurred to me. The first was that Yarrow questioning Bob Dylan was beyond rhetorical, as he probably could have asked him directly.  (Dylan wrote “Blowin’ in the Wind,” but it was Peter Paul and Mary who first recorded it.)

The second thing that came to mind was that my friend and former editor-in-chief of the Press, Robbie Woliver, would be gravely disappointed in me for not recognizing Peter Yarrow and grasping the significance of the moment; a realization that was made clearer to me in researching the origins of the song. As it turns out, the first public performance of “Blowin’ in the Wind”—it would become one of the seminal anthems of the ’60s protest movement—was at Gerde’s Folk City in 1962. Robbie and his wife, Marilyn Lash, co-owned Folk City for several years in the 1980s.

Yarrow’s timely reappearance at Occupy Wall Street underscores the similarity between the anti-establishment, anti-corruption sentiment of the 1960s and today. Further, his comments regarding the negative male influence in world affairs are perfectly in context with the situation on Wall Street. When you examine the litany of geniuses who wrought havoc in the markets in their profligate quest for unmitigated deregulation, you’re hard-pressed to find the fairer sex among them. Sure, there are stand-outs such as Wendy Gramm, but even in her case it can be argued that her depravity pales next to that of her husband. As the saying goes: Behind every terrible woman is an asshole. (Or something to that effect.)

History is replete with examples of men behaving badly to the detriment of civilization. Citing women as the reason for some of our bigger peccadilloes—Helen of Troy causing the Trojan War, Eve getting us all kicked out of the Garden, yada yada—is a favorite device of the male historian. Leading up to and during the financial meltdown, omniscient wizards such as Larry Summers, Alan Greenspan and Robert Rubin eschewed the warnings of women like Brooksley Born, head of the Commodity Futures Trading Commission from 1996 to 1999, and continued their blitzkrieg of destruction. These guys keep breeding more insufferable free market ideologues like Tim Geithner, who fought Sheila Bair, head of the Federal Deposit Insurance Corp. from 2006 to 2011, who railed against the concept of “Too Big to Fail.” To the free market jerkoffs like Greenspan and Geithner, Born and Bair were considered “difficult.” That’s man-speak for “tough.” Creative wordplay like this is how we men diminish effective women; better to be a bastard than a bitch in the worlds of high finance and government.

The most notable among all of these “difficult bitches” today is the earnest and brilliant Elizabeth Warren, who is running for Ted Kennedy’s old senate seat in Massachusetts against fluke incumbent Scott Brown. The funny thing about that race is that for Warren, this seat is actually a consolation prize from President Barack Obama. After leading the fight to create and organize the Consumer Financial Protection Bureau, Warren was the presumptive nominee to head the agency upon its formation. Shockingly, however, the POTUS buckled under pressure from Senate Republicans, who threatened to block a Warren appointment, and instead he installed the even more hardcore and controversial Richard Cordray to the position under a recess appointment.

While I might not be able to spot one of the world’s most famous folk singers even when he’s performing one of his biggest hits in front of a crowd at a demonstration (it’s even worse when put that way, isn’t it?) I do have a keen sense of irony and a dark sense of humor. It’s why I can appreciate that while my gender has driven the world’s economy in the ground, they did so in pursuit of an ideology set forth by a woman. Somewhere in hell, Ayn Rand is doubled over with laughter watching obsequious and dim-witted men like Alan Greenspan trip over themselves in an attempt to become the Howard Roark of finance or John Galt incarnate. Ayn Rand is the Helen of Troy of the economy, the Eve of financial catastrophe, the…

(Did ya see what I did there?)

Onions and Oil

The marriage of deregulation and technology over the past several decades has birthed franken-markets that influence nearly every aspect of our daily lives.

Sam Siegel and Vincent Kosuga were an unlikely duo. Siegel owned cold-storage facilities on the outskirts of Chicago, which held and distributed, among other things, onions delivered by farmers from around the country. Kosuga was a boisterous, larger-than-life farmer and amateur chef from the Catskills who grew onions that would find their way to Siegel’s warehouses. The man could cook just about anything as long as the recipe called for onions. Perhaps his greatest concoction, however, was the scheme he cooked up while trading onions on the floor of the Chicago Mercantile Exchange (the “Merc”) with his storage partner-turned accomplice, Sam Siegel.

Both men made good money hedging their onion farming and gathering operations by trading onion futures in the 1950s at the Merc. Like most of the men they traded alongside, Siegel and Kosuga possessed iron constitutions for risk. To outsiders theirs was a bizarre world filled with a ragtag bunch of gamblers who spoke furiously with their hands, called one another by their trading nicknames and kept mostly to themselves. It was an insular existence. Then one day Siegel and Kosuga’s actvities drew an unwelcome light on the clandestine world of commodities trading and prompted Congress to blacklist onions from trading on the exchanges.

Here’s how it went down. Because Kosuga controlled a large portion of onion growth and both men had the capacity to store excess supply along with the financial wherewithal to purchase contracts for delivery from other onion growers, they effectively controlled the price when the product came to market. It was a classic “corner.” When the harvest came in 1956, they bet against the same growers they contracted with by placing sell orders in the Merc while simultaneously dumping their excess inventory, thereby flooding the market with onions and driving prices into the ground. In an instant, Siegel and Kosuga made millions while many farmers went broke, buyers were left bewildered and onions were rendered worthless.

Their plan worked so well that President Dwight D. Eisenhower signed the Onions Futures Act in 1958 to prevent the trading of onions forever. Onions, it seemed, were too important to allow unscrupulous speculators to monkey with.

By and large the commodities markets were extraordinary examples of self-regulation. Instances of malfeasance such as the corner perpetrated by Siegel and Kosuga were typically rooted out quickly. Volatility might have been a trader’s best friend, but fraud was never tolerated. It was somewhat of a code of honor, the trader’s ethos. The self-policing activities at the Merc or their crosstown rivals at the Chicago Board of Trade caught the eye of free market ideologues like the economist Milton Friedman who would argue in the latter half of the 20th century that free markets were pure and without boundaries; that any outside influence, particularly governmental, would dilute and corrupt the process.

Friedman’s work would not only earn him a Nobel Prize in Economics, it would inspire a generation of free-market enthusiasts such as Alan Greenspan, Federal Reserve chairman, and Robert Rubin, Secretary of the Treasury. But it was Friedman’s friend and protégé, Leo Melamed, the egotistical and charismatic head of the Merc, who would change the nature of trading more than any other person in modern history.

In 1972 Melamed established the International Monetary Market (IMM) within the Merc to facilitate the trading of currencies afer President Richard Nixon repealed Bretton-Woods, which removed the United States from the gold standard and allowed world currencies to float. In short order Chicago would no longer be known as the “second city” when it came to trading. The IMM caught fire and opened the possibility of trading futures on just about anything. Everything, that is, except onions.

Without historical context, it would be impossible to comprehend why President Barack Obama isn’t doing more to contain the ravenous behavior of market traders. There are really two overarching reasons why this is the case. First, to understand these markets is to appreciate how institutionalized and endemic trading is to Chicago culture. Then-Illinois Sen. Obama, for example, was one of the first to congratulate the aging Melamed on the historic merger of the Merc and the Board of Trade to  create the behemoth CME Group. The political and financial elite in Chicago would sooner give up the Cubs rather than commodities trading.

The second, more obvious reason is that financial markets today dwarf the federal government. Trading futures on commodities such as wheat, flax, onions and potatoes are quaint reminders of a bygone era. Images of bleary-eyed traders crammed into pits, throwing paper on the ground and making quizzical gestures in the air belong on the walls of a museum.

The marriage of deregulation and technology over the past several decades has birthed franken-markets that influence nearly every aspect of our daily lives. From controlling pensions and mortgages to home-heating oil and bread, traders are pagan gods and we are their minions. Although markets today are bigger and faster, the underlying truth to the trading game is simple, proven and unwavering:

For every winner, there is a loser.

In today’s world Siegel and Kosuga are Goldman Sachs and Morgan Stanley. Except these guys won’t be caught because they changed the rules. They control the markets, the exchanges, the products that are traded and the currencies we use. They have the ability to name their price then bet against their own recommendations. It’s the perfect modern corner. And it has the markets behaving badly and acting counter-intuitively.

It is why exchanges no longer react to normal market forces like supply and demand, weather patterns and monetary policy. It is why oil prices remain high during a recessionary period and weak demand, why the dollar has retained relative strength despite “quantitative easing,” and why food prices remain out of reach for people in developing nations. It is why deregulation failed the public and enriched companies like Goldman and Morgan.

These companies do more than move the markets. They move economies. Nixon may have started the ball rolling and Obama might be powerless to control it today, but every Congress and president in between have been complicit in the world’s greatest shell game that moves money from around the globe into the accounts of just a handful of firms.

Deregulation fanatics can scream about the government all they want but they’re ignoring the fact that the government lost control of the country long ago. All the proof you need is in Chi-Town. Fifty years ago onions were considered too crucial to the public good for traders to bet on. Today, everything from crude oil to the almighty dollar is on the craps table and traders are using loaded dice.

If you love this shit as much as I do, check out The Futures by Emily Lambert (Basic Books) and Zero-Sum Game by Erika Olson (Wiley).

Our Prime Yearning Years

The only true and good thing about Ayn Rand and objectivism (a fancy word for “that which screws the masses”) is that they’re both dead. Rand may have been a wonderful writer but objectivism is the Scientology of economic theory.

Part II of The Season of Our Disconnect (PART I)

Alan Greenspan
"Deregulation is fundamen... what's that dear? Oh yes, I would like some more pudding."

The haul from Hempstead Harbor was so big the first week it had reopened after being closed for more than 40 years of remediation that the axle on my friend Jimmy’s truck was bending slightly at the end of each day. He said the mood of the other diggers on the water was ebullient. Their boats were tightly locked together, with guys shouting to one another in celebration; it was a strange scene for men who typically toil in solitude to put food on their table by harvesting the ocean floor for food to put on our tables.

I caught up with Jimmy at the end of the first week, and he said, although he was physically exhausted, he wouldn’t trade the week for anything. According to him, the only disappointment was the complaints registered by local residents on the hill overlooking the water who were unhappy to discover their formerly too-toxic-to-fish harbor suddenly filled with small commercial vessels.

It seems the boats’ presence was less of an environmental and commercial triumph and more of a case of urban blight. Jimmy shrugged it off but his words stuck with me. He characterized the irate citizens’ reaction as both funny and sad, saying, “It’s amazing how people with millions of dollars are complaining about watching me scrape hundreds of dollars from the ocean floor.” Though nothing came of their complaints, it is another example highlighting our Season of Disconnect when class warfare seems to be erupting in every corner of our nation.

While politicians argue about the debt ceiling and preserving tax cuts, the big, slogging, hairy middle-class squeeze continues. Across the country people are either accepting the “new normal” or, worse, turning their pitchforks and torches on one another instead of storming the castle. Somehow we’ve lost sight of what brought us here and who is to blame for all of this—and there are some very real people and institutions to condemn.

Those who dare to protect “entitlements” are vilified by the free market despots in this nation who have taken hold of the seminal piece of misinformation that has infiltrated every meaningful discussion regarding the economy: that government is somehow corrupting the markets by attempting to inject any level of consumer protection into the financial system. Rays of common sense such as Vermont Sen. Bernie Sanders’ impassioned plea to restore sanity to the markets and protect America’s working class shone brightly for a moment only to be snuffed by the likes of Michele Bachmann and her quixotic presidential campaign kickoff.

This is a woman who mistakenly believed discussions about pegging global markets to Chinese currency instead of the dollar meant that the Treasury was actually contemplating using Yuan as America’s official money. Beyond the usual mash-up of libertarian, conservative, objectivism ideals that comprise the Tea Party, Bachmann (of course) believes that climate change is a hoax, that anyone who supports healthcare is unpatriotic, and that the best way to protect Americans and the U.S. economy is to dismantle the agencies designed to protect Americans and the U.S. economy.

It’s this last point that is so troubling because it’s what people like Bachmann are gaining traction with. Even the former Fed Chairman Alan Greenspan, the most famous and powerful disciple of free market guru Ayn Rand, testified before Congress that his extreme laissez faire policy and “markets-will-cure-all” attitude were devastatingly wrong because they fail to recognize the most natural  fundamental force that comprises the capitalist economy: Greed. Don’t get me wrong. Greed is indeed an important component of capitalism as it is simply another name for competition. But it cannot go unchecked, as it will feed on itself and everything around it when unfettered by logical behavioral constraints.

To put it bluntly, Alan Greenspan was wrong and admitted as much. So were Treasury Secretary Robert Rubin, Senate Banking Committee Chairman Phil Gramm, Securities and Exchange Commission Chairman Arthur Levitt and Treasury Secretary and White House economic advisor Larry Summers. So too were the men they served who facilitated their beliefs. Presidents Reagan, H.W. Bush, Clinton, W. Bush and now, Barack Obama, all of whom surrounded themselves with these free market hucksters and relied on the dearth of financial wherewithal in Congress while counting on the masses’ inability to understand the destructive potential of unregulated markets.

 

The only thing that is honest and true about Ayn Rand and her theory of objectivism is that they’re both dead. Ayn Rand was a wonderful writer. But in terms of her being considered a prophet of sorts, Rand’s theory of objectivism (a fancy word for “that which screws the masses”) is the Scientology of economic theory. And yet, one of history’s silliest figures is now gathering momentum with copies of Atlas Shrugged flying off Amazon’s virtual shelves and middle America wondering aloud, “Who is John Galt?!”

Forget John Galt. We need to start asking the question, “Who are we?” America is stuck in the largest identity crisis we have faced since the Civil War. The unmitigated and unwarranted assault on the middle class, the working poor and, yes, the poverty-stricken in this nation, must end. We begin by restoring authority to the regulatory agencies in our nation instead of simply requiring more bureaucratic paperwork for businesses already playing by the rules. Business owners know the difference between prudent regulation and the appearance of it.

On a level playing field it’s possible to get ahead while looking down on everyone else. It might even change the perspective of a person jaded enough to be offended by the view of men scraping shellfish from the ocean, no matter how far up the hill they live.

Capitalism and Regulation Are Not Mutually Exclusive

Deregulation became the mantra of free market capitalists who view all government intervention into the markets as a complete affront to our democratic principles, as though the two are somehow connected. It sounded sexy and even seemed to be working for a while until our speculative chickens came home to roost and laid rotten eggs in all of our coops.

John Boehner NY Economic Club
House Speaker John Boehner speaking in New York

Osama bin Laden’s body has barely come to rest on the ocean floor and the Republicans are back in attack mode against the Obama administration. Speaker of the House John Boehner is taking his spending-cut crusade on parade again in the run-up to the vote to raise the nation’s debt ceiling. In doing so the Ohio Republican is not only acquiescing to the clamorous Tea Party faction of the GOP but to the special interests that define their politics.

The debt ceiling debate is the ultimate diversion from the more genuine debate that should be taking place in Congress. This is not to say it is without merit. But like so many political disputes, our politicians are intent on examining the symptoms of a crisis instead of deconstructing the root causes. The fact is our enormous national debt is a result of fighting two costly, protracted wars abroad and bailing out hooligans on Wall Street who engineered the greatest heist in American history. The problem is the GOP wants to fix everything else they deem to be wrong with the system without addressing these two key components of our indebtedness. 

Boehner and company are continuing the charade begun when Ronald Reagan was king and Alan Greenspan was God. Deregulation became the mantra of free market capitalists who view all government intervention into the markets as a complete affront to our democratic principles, as though the two are somehow connected. It sounded sexy and even seemed to be working for a while until our speculative chickens came home to roost and laid rotten eggs in all of our coops.

In a speech earlier this week to the Economic Club of New York, Boehner returned to the key conservative talking points, excoriating Washington for pandering to banks that are too big to fail without addressing the deregulatory fever in the Beltway that created this situation. He criticizes instead the government’s bailout response, saying that our “debt mostly borrowed from foreign investors caused a further erosion in the economic confidence of America and increased uncertainty for millions of private sector job creators.” If you asked these so-called job creators why they aren’t adding more people to the payroll or taking on more capital projects, I highly doubt the resounding answer would be America’s debt. Under President Reagan our debt skyrocketed but these same job creators doubled-down and invested in America, making the logical question: Why not now? Boehner went on to claim that the “massive borrowing and spending by the Treasury Department crowded out private investment by American business of all sizes.” That’s funny. I could have sworn that by keeping interest rates at practically zero, business owners would have been encouraged to borrow and invest in their companies with alacrity. 

This is where the GOP message gets into funky territory. You would be hard-pressed to find an economist who would deny that pumping bailout funds through the financial sector prevented a total collapse of our economic system. Everyone won in the short run. But because Congress was too cowardly to fix the structural regulatory issues in the banking industry, the big winner overall was Wall Street. The bailout allowed the banks to partake in riskless arbitrage (borrowing money at no cost and investing it in guaranteed government bonds for example) and bypass the private sector and individuals in desperate need of lending support. It’s one of the primary reasons the Dow Jones Industrial Average continues to rise despite a still-flagging economy; the dollars are flowing at the top with very little pulsing through the rest of the economy. But the concept of arbitrage is largely lost on Americans and our politicians are reluctant to talk about it in a meaningful way, instead choosing to focus on the national debt.

What’s worse is that the banks have presumably used a good portion of this money to invest in opaque investments that have artificially created crises in the agriculture and energy sectors. I say “presumably” because no one can really be sure where some of this money is being invested because the regulatory environment is still so broken and corrupt that the funds are impossible to track directly. It’s the pricing and behavior of these markets that gives them away. Energy supply is at an all-time high, demand is still perilously low yet the markets are soaring because unknown companies are pouring billions of dollars through small commodities exchanges and wildly impacting the prices of these investments. This phenomenon translates directly into high gasoline prices and rising food costs, thereby suppressing the recovery and obliterating household savings. Here again Boehner changes the subject, suggesting that the Obama administration is somehow keeping “energy resources under lock and key.” Further, he accuses Democrats in Congress of “creating more uncertainty for those who create American jobs” by raising “the specter of higher taxes.” Another direct attempt to divert the conversation from reality. After all, didn’t we just extend the Bush-era tax cuts? And weren’t these the same tax cuts that were in place prior to and during the economic meltdown?

This year Forbes added 214 new billionaires to its list of the world’s richest people. That’s up from 97 new billionaires last year. In perusing the list of the richest Americans, it’s interesting to note where the wealth of those whom Boehner touts as “job creators” is derived. Hedge funds, investing, oil, pipelines, retail, chemicals and pharmaceuticals are the industries that dominate the roster. Most of these companies employ relatively few people compared to the billionaire industrialists of old. No infrastructure companies, few manufacturing companies, and a handful of high-tech companies appear on this list. And of the ones that do appear, most of them manufacture overseas. I guess in Boehner’s world a job created in Bangalore is equal to one created in Scranton. What many of these industries do have in common is that they represent the vast majority of campaign contributors to people like John Boehner.

So it begs the question: Who is Boehner trying to protect? In his New York address he repeatedly refers to the “arrogance of Washington” even though that’s where he’s been working since 1990. Arrogance is not trying to pay for past transgressions by taxing those who devastated the economy. Arrogance is cutting the government’s primary funding source via an extension of the Bush-era tax cuts and attacking entitlement programs instead of the regulatory issues that brought down America’s entire economic system.

Where the White House fails is by indulging in debates over the debt ceiling and releasing oil reserves while bickering over entitlements. Our economy cannot, will not, improve until our elected officials have the courage to restore sanity to the marketplace by re-implementing the regulations that properly governed debt, equity and commodities trading for decades.

In recent testimony to the Congressional Oversight Panel on the impact of the TARP, Columbia University professor and former Clinton advisor and chief economist of the World Bank Joseph Stiglitz argued that “we have not repaired our banking system, and indeed, with the enhanced moral hazard and concentration in the financial sector, the economy remains very much at risk.”

Joseph Stiglitz

These arguments are nothing new to the Nobel Prize-winning economist, who in 2008 warned of the enduring negative consequences of deregulation. At a hearing held back then by the House Committee on Financial Services, Stiglitz invoked Adam Smith, saying that “even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions to this is to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standard of our highly regulation financial entities.” For emphasis, he notes that “we have shown that we can do this when we want, when terrorism is the issue.”

He’s right in every aspect. This is economic terrorism that Americans are unwittingly enabling by allowing politicians in Washington to skirt the issue of financial reform and to skip tighter regulations in favor of continuing tax breaks, cutting spending on infrastructure and demonizing programs that provide security for the sick, the aged and the unemployed.

Yet no matter how often people of Stiglitz’s ilk provide testimony, no one on these committees either understands or cares what is being offered. I suppose that just because we call them “hearings” doesn’t mean anyone is necessarily listening.