The Critical Need for Financial Regulation


FINANCIAL REGULATION

There have been three major financial meltdowns in the United States in the past few decades.  There was the Savings and Loan Crisis of the 1980’s under President Reagan.  There was the 2002 Wall Street Collapse and the Financial Markets collapse of 2008, both under President George W. Bush.   What these three events had in common was that they were all triggered by a lack of federal regulation of our financial system.

1980

The Savings and Loan Crisis was created by the Reagan era push to deregulate businesses.  Thrift institutions were given the powers of commercial banks, but without the oversight given to the banks.  The result was a feeding frenzy of greed and mismanagement that caused the collapse of 747 out of 3,234 thrift institutions.

2002

The collapse of the financial markets in 2002 was due to a total failure of the Securities and Exchange Commission to oversee the nation’s securities industry.  The only person who appeared to be trying to regulate the securities industry was Eliot Spitzer, who was then the Attorney General of New York.

The business failures caused by fraud and mismanagement were legion.  Enron, WorldCom, and Arthur Andersen were just a few of the most noted reprobates.

There was a culture of financial greed and deception like this country has never seen.  Most if not all the major money center banks and brokerage houses were knowingly selling trash securities to their customers and charging very high commission rates in the process.  Arthur Andersen was out teaching seminars on how companies could set up shell corporations and operate according to the Enron model.  Energy companies were shutting down power plants, creating artificial shortages of electricity.  They would then sell the “replacement” power on the spot market at enormous costs to relieve the “shortages”.  The Federal Energy Regulatory Commission (FERC) refused to stabilized the market, and instead gave the predators free rein.

2008

The collapse of our financial institutions has led to a world-wide recession.  This latest crisis was brought on by an institutionalization of corrupt loan practices.  It began with the birth of the “liar loans.”  Anyone who could fog a mirror was given a loan.  With housing prices building a bubble no one seemed to expect a burst.  People were given mortgage loans that they could not afford.  But the banks would tell them not to worry.  After all, with the way that real estate was escalating in price all they needed to do was to hold on to the property for several years and then sell it at a higher price giving them enough money to settle their debts and still have money left over.

Then these “liar loans” were securitized and given stellar ratings by the rating agencies.  It is as if the banks, rating agencies, real estate brokers, insurance companies, investment houses and government regulators were all working in collusion with one another. When the bubble burst there was nowhere to run.  These securitized “liar loans” were ubiquitous throughout the global financial markets.

These three recent financial crises should make obvious the need for strong and effective federal regulation of our financial markets.  We should know by now to resist the call for a reduction of regulation to spur business.  The results of such reductions will be to give the predators free reign to loot and pillage, while crippling our financial markets and destroying trillions of dollars in wealth.

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