The collapse of financial regulation since 1980 & its consequences — Lawrence Lessig sums it up
For the moment, I just want to highlight one very trenchant passage:
Before 2008, the zeitgeist was deregulation, and Wall Street succeeded in getting deregulation. Frank Partnoy calculated for me that in 1980, 98 percent of financial assets traded in our economy were traded subject to the normal rules of transparency, anti-fraud requirements, basic exchange-based rules of the New Deal. By 2008, 90 percent of the assets traded were traded invisibly because they were not subject to any of these basic requirements of transparency and anti-fraud exchange-based obligations.As I noted a few weeks ago, every discussion about the economic crash of 2007-2009, which was touched off by a massive financial crisis, should begin with the striking fact that there were no serious financial crises in the US between the New Deal and the beginning of the Reagan administration. This was no accident. During the the 1930s a remarkably intelligent set of regulations was enacted to cover banking and the rest of the financial sector, and it worked.
Over time, new types of financial activities developed that evaded or circumvented this regulatory framework, but the system was not revised and extended to cover them. Instead, starting in the 1980s, that whole framework of financial regulation was increasingly dismantled—not sensibly updated and adapted to new conditions, but heedlessly dismantled—in a process that combined free-market-fundamentalist ideological illusions with substantial amounts of irresponsibility, plutocratic muscle, political corruption, and simple greed.
At the same time, in a vicious cycle of mutually reinforcing processes, the financial sector—including a whole "shadow banking system"—metastasized out of control and swallowed up an ever-larger share of the economy. The overflowing funds, increasing political clout, and ideological prestige of the financial system were used, in turn, to promote further deregulation. And it so happens that during the same period, starting in the 1980s, we have once again experienced recurrent financial crises (and massive bailouts), escalating most recently into the great financial crash of 2007-2009 from whose consequences we are still recovering.
(For one very informative picture of how this all worked, by the way, I recommend watching Charles Ferguson's excellent documentary film "Inside Job", a guide for the perplexed which, among other things, does an impressive job of explaining esoteric financial arrangements like securitization, credit default swaps, and collateralized debt obligations in clear and comprehensible ways. If you want to start with a brief but illuminating video clip, Elizabeth Warren boils the story down to its essentials here.)
So what happened next? Lessig continues:
But the really astonishing thing is that after 2008, after we suffered the biggest collapse since the Depression, after every independent analyst had said there was a link between the structure of deregulation and the collapse, after the dean of deregulation—Alan Greenspan—confessed he made a mistake in assuming that the self-interest of the banks would lead them to behave virtuously rather than behave in a way that would drive to their maximum profit, after all of that, even then, Wall Street was able to blackmail the Democrats and the Republicans into handing them essentially a “Get Out of Jail Free” card and effect no fundamental change in the architecture of our financial system. That is, frankly, terrifying.That formulation is a little too generous to the Republicans, since on the whole they should be seen as perpetrators more than victims. (Along with a lot of Democrats, of course—though it's wrong to simply impute moral equivalence in these matters to the Republican Party and the Democratic Party.) But it's true that Republican politicians have also been caught in a self-reinforcing system that's increasingly hard to break out of even if one wants to. And yes, it is terrifying.
Meanwhile, anyone who gets their information about the current Great Recession, and about the political economy of the United States more generally, from sources like the editorial page of the Wall Street Journal, Fox News, and the Republican presidential campaign is presented with an alternate universe in which Wall Street and financial deregulation had nothing to do with precipitating the crash. Instead, the fault lay entirely with quasi-governmental institutions like Fannie Mae and Freddie Mac and with the consequences of the 1977 Community Reinvestment Act (which supposedly forced banks to issue sub-prime mortgages to poor people and minorities). This nonsense was recently summed up, in truly astounding statement that might seem to vindicate the crudest versions of a Marxist theory of class-bound ideology, by none other than New York City's Mayor Michael Bloomberg:
It was not the banks that created the mortgage crisis. It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp [....] But they were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will. They were the ones that pushed the banks to loan to everybody.I happen to know some intelligent, serious, and well-informed people who have been taken in by this propaganda, and like most propaganda it does contain some grains of truth, but overall it's just a fable. (For a patient explanation of some of the reasons why, see here.) However, this nonsense is far from being harmless, since as long as the real sources of the problem are ignored or obscured or distorted out of recognition, it will be hard to generate the political will to do anything constructive about them.
What we really need is a new New Deal, updated for the conditions of the early 21st century. I think some of Obama's supporters hoped he would deliver this, but obviously he hasn't (and probably never intended to). And prospects for the foreseeable future are not promising. But the first step is to start facing reality.
Yours for reality-based discourse,
P.S. Lessig's new book sounds as though it's worth reading, too. I was struck by several other perceptive passages in his interview, including this one:
The actual activity of fundraising is terrible and nobody really likes it. And it would be kind of comical, if it weren't so tragic, to see them running from Capitol Hill to their little cubby hole with their headsets dialing people they’ve never even met and asking them to give money. It’s really just grotesque.
But the other part about it is the way in which it infects what we imagine a Congress would be there for. If you started in 1794 and looked at our Congress, and compared it to the House of Commons, the two would look pretty much the same—you have people sitting in a room for five or six hours a day while they're in session, debating with each other, arguing about the ideas. Not necessarily that it’s the greatest of the arguments but they’re trying to do what you imagine a deliberative body would do—deliberate. Jump ahead to today, the House of Commons doesn’t look that much different, you still have sessions where everybody’s sitting there and debating, and they have question time where there’s real activity. But switch to C-SPAN covering the U.S. Congress and it’s a completely different picture. You can’t see it, because they don’t allow the camera to pan around, but the hall is empty, people coming to speak just to C-SPAN—they’re not speaking to each other—all of the activity of negotiation and deliberation is done outside the chamber; there’s no deliberation, so you just have to ask, “Why did we create a Congress?” The framers didn’t sit down and set up a Congress so they could imagine these 535 independent contractors all arbitraging fundraising opportunities. If that’s what the institution is, then let’s just shut it down.