We Won’t Get Fooled Again

President Obama’s new regulatory reforms are weak and ineffective, and they will do almost nothing to rein in the worst excesses of Wall Street. That’s the charge being leveled by a wide variety of business commentators, and even by legislators in Obama’s own party. The only constituency that likes the reforms are the bankers. They should, they may as well have penned them. Is this “change we can believe in?”

The plan is still sketchy, but the details revealed so far paint a picture of a President no less in the pocket of big banking than any others have been. This is not why my wife was out on so many early mornings holding Obama signs on highway overpasses. In announcing the new regulatory scheme, Obama starts off by chiding “a culture of irresponsibility (that) took hold from Wall Street to Washington to Wall Street.” But right away he gets all wishy-washy and talks about how the regulatory system was “overwhelmed by the speed and sophistication of a 21st century global economy.” The implication is that no one was really to blame.

As award-winning writer and author William Geider puts it: “That is not what happened, to put it charitably… The regulatory system was not overwhelmed by historic forces. It was systematically gutted and dismantled by the government in Washington at the behest of the banking interests. If Obama wants details, he can consult his economic advisors--Summers-Geithner--who participated directly as accomplices in unwinding the prudential rules and regulations. Cheers were led by the Federal Reserve with heavy lifting by both political parties.”

In his June 19th piece in The Nation, Geider goes on to say how similar this is to stumbling into Iraq with false CIA telemetry and then claiming “hey, we were all fooled.” Just like Iraq was premeditated ideological adventurism, with facts on the ground ignored and/or distorted to fit that ideology, this meltdown, and the official response to it, is robber barons plundering the nation under State protection.

The biggest problem with the new regulations lies in giving much of the power to the Fed. At a time when more and more people are questioning the murky and secretive nature of the Fed, and its outsize role in manipulating money for the benefit of the wealthy elite, it hardly seems a good idea to make them the watchdog of Wall Street. As Geider says, “give the mess to the Wizard of Oz, the guy behind the curtain.” 230 House members have endorsed a measure to audit the Fed (this has never been done). Even Nancy Pelosi has said “The American people want to know more about The Secrets of the Temple,” which was a good plug for Geider’s book of the same name, about the Fed. Chris Dodd (D-Conn.) likens trusting the Fed with more regulatory power after their complete failure to stop out-of-control greed, to “a parent giving his son a fast new car after he just crashed the family station wagon.”

This “irresponsibility” President Obama keeps talking about, as if someone was naughty and needs a good talking to, is fraud and corporate crime, pure and simple. The cure for that irresponsibility is to crack a few heads and send some of the worst offenders to prison. It is not as if it’s a mystery who they are.

This notion of responsibility is at the heart of what’s wrong with most everything. Responsibility has to start with a detailed, in depth understanding of everything that led to the breakdown, something that has been scrupulously avoided. At the risk of being repetitive, building a new stable economy without really understanding what happened to the old one is nonsense, and dangerous nonsense at that. Steven Pearlstein at the Washington Post mocks the new regulations as “not being grounded in a thorough and independent analysis of how the crisis was allowed to develop and what regulators did and didn’t do to prevent it.”

Securitized mortgages were at the heart of the meltdown. Wall Street was able to bundle junk, collect a huge fee, and pass the mess on to unsuspecting investors. New regs would require the originator to retain a 5% stake. That will not make them responsible. 50% would.
Glaringly missing are any new controls of hedge funds, private equity funds, structured investment vehicles, derivatives, or credit default swaps. Some of this stuff is only dimly understood, even by the people that trade them, and still represent a potential cloud of doom hanging over the economy.

The only bright light is the new consumer protection agency to control Wall Street’s predatory behavior. Ironically, some House member, I can’t remember which one, but a Republican, got up during the debate and decried that cracking down on the credit card companies would raise the cost of credit to consumers. Elizabeth Warren, Harvard Law Professor, head of the Congressional Oversight Committee on the bailout, and the one brave and brilliant high-profile critic of Wall Street out there today, laughs about that. “So the only way these companies can survive is to con and trick their customers?”

Wall Street warns against new excessive regulations stifling the fragile recovery. But what has really changed that would cause us to think a recovery is around the corner? As John Carney writes in the Business Insider, “the financial sector faces almost all the same challenges it did last autumn—uncertainty about profits, outdated business models, heavily leveraged balance sheets, self-dealing, short-term thinking by bonus-hungry executives, ineffective regulation and—perhaps most of all—a huge amount of credit assets of extremely questionable value.”

In as much as I was cheering the downfall of the Bush Jr. administration, what most presidential historians are now calling the “worst presidency in US history,” I didn’t think it would involve such a complete evisceration of the Republican party. Now I’m lamenting the lack of an opposition with any gravitas. And as Frank Rich, New York Times columnist writes, “That’s a double-edged sword for Obama.”

The fact is, nothing much has changed on Wall Street. The SEC has charged Angolo Mozilo, (Countrywide CEO) with insider trading, but that was a no-brainer. The revolving door between the SEC, Washington, and the boardrooms of Wall Street is as greased as ever. The rating agencies are still being paid for ratings by the companies they rate. Eric Dash writes in The Times “It is as if Hollywood studios paid critics to review their would-be blockbusters.” The CEOs are not in retreat, they are re-grouping and re-branding (AIG is now AIU).

To paraphrase Frank Rich writing in the New York Times, the “hope” phase of Obama’s presidency is now evolving into the “change” phase, and we won’t be fooled again. Even if these new porous regulations permit another meltdown a decade hence, Obama might still look pretty good. But if, in the shorter term, the economic quality of life for most Americans remains unchanged as the financial sector resumes living large, he’ll face anger from voters of all political persuasions.

Doug Friesen
July 5 2009