Every time I hear a big industry crab about how some new set of government regulations will mean the end to life as we know it, bring the economy crashing down around our heads, or burden the consumer with more passed-on costs, I think of the smartest words Ronald Reagan ever spoke.
They were: “There you go again.”
Reagan and I wouldn’t have seen eye to eye on much, but this phrase sums up my exact reaction to the arguments by the financial industry and its chums in Washington against the financial regulation bill now before Congress.
It’s not just that they’re opposed to any new initiatives — that’s just industry doing what comes naturally. It’s the dismal sameness of the arguments, decade after decade, that gets to me.
The bankers’ brief against regulation today is that the reforms will stifle economic recovery, hamper sound investment, create an uncontrollable government bureaucracy, and overburden small businesses. They also said that the government regulations were unnecessary because business was perfectly capable of regulating itself.
They made exactly the same arguments in 1933 and 1934, when Congress enacted a historic round of banking, securities and stock exchange reforms.
Let’s compare remarks made April 29 by Sen. Richard C. Shelby (R-Ala.), an opponent of the latest reform proposal, with statements in 1934 by Richard Whitney, then the president of the New York Stock Exchange.
Shelby: “We are still left with a bill this afternoon that will create massive and intrusive new government bureaucracies....”
Whitney (letter to the presidents of all listed corporations, Feb. 14, 1934): “The … commission might dominate and actually control the management of each listed corporation.”
Shelby: "… reduce private investment in productive projects, make risk management more difficult, and threaten our economy....”
Whitney: (letter to President Franklin D. Roosevelt, April 12, 1934): “The immediate and necessary effect of … enactment will be a renewed deflation of security prices and a dislocation of business which will unquestionably interfere with your program for recovery.”
The commission Whitney named was the Federal Trade Commission, which was eventually replaced in the bill by a new Securities and Exchange Commission.
But he didn’t like the new commission any more than the old, nor did he relish the public reports that under the bill would have to be made by corporations, their top officers and major shareholders. These included “elaborate financial and other statements … many of which must be certified by independent certified public accountants,” he warned.
The rules and regulations protested by Whitney did go into effect, of course, after enactment of the Securities Exchange Act of 1934.
Did they hamper capital formation, reduce the liquidity of the stock exchange and stifle recovery, as Whitney predicted? On the contrary, the rules helped give investors the confidence in the capital markets necessary for this nation’s recovery in the postwar period and its majestic economic growth for decades to come.
In 1933, Wall Street’s name was mud. The Senate’s investigation of stock exchange practices under the dauntless Ferdinand Pecora exposed the black bag of lies and chicanery that had stolen the life savings of millions of Americans. Without the reforms of 1933 and 1934, the markets’ credibility might never have recovered.
But the way of the world is for regulated industries to go to the mat against new initiatives, no matter how prudent and sensible they might be. Almost always they prove to be positives for the industry, not disasters.
In June 1933, the American Bankers Assn. urged its members to “fight … to the last ditch” an “unsound, unscientific, unjust and dangerous” proposal then making its way through Congress.
The target? Federal deposit insurance.
The Federal Deposit Insurance Corp. was created over their objections (and, it should be said, the opposition of Roosevelt). What happened? Deposit insurance “succeeded in achieving what had been a major objective of banking reform for at least a century, namely the prevention of banking panics.”
These words come from the economist least likely to deliver knee-jerk praise for the New Deal, Milton Friedman. As Friedman observed in his landmark “A Monetary History of the United States” (written with Anna Schwartz), in 1933 there were 4,000 bank failures. In 1934, among insured banks there were nine. After that, except for the savings and loan crisis and deregulatory years of the 1980s and early ‘90s, the bank failures in almost every year can be counted in single digits — even in the disaster year of 2009, the number of banks failed or assisted by the FDIC was a surprisingly modest 148.
It’s not just Wall Street. In the 1970s, the auto industry groused that Washington’s taste for safety regulations was setting up Detroit to get eaten alive by the Japanese. Today, automakers fall over each other to enumerate their cars’ safety features, safety having turned out to be something American consumers appreciate.
One common tactic of industries facing new regulations is to try to derail them by pledging to police themselves. Whitney in 1933 traveled to Washington with a portfolio of self-regulatory initiatives he hoped would head off the exchange control bill. Congress rightly recognized that as a promise to deliver the investing public’s interests “into the hands of the representatives … who officiated in the looting of these people.” (The words are the New Republic‘s.)
Today the Washington lobbyists for the international derivatives industry assure us that the purveyors of these monstrously complicated financial wagers, which contributed to the downfall of major Wall Street institutions and the mortgage market itself, are working “proactively” to change their markets “for the better.”
Should Congress go along or pursue derivatives regulation of its own? Perhaps the answer can be found in the testimony of Thomas G. Corcoran, a drafter of the 1934 securities act, who was asked at a Senate hearing to identify the “chief sinner” in the manipulations that the New York Stock Exchange had allowed to take place under its nose for years.
“It is hard to tell who is the chief sinner, sir,” he replied. “There are so many sinners.”