Saturday, September 27, 2008

S.E.C. Concedes Oversight Flaws Fueled Collapse

From the New York Times:

The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.


“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.


Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

More here.

Atrios over at Eschaton, an economist by training, noticed the same article and called "voluntary regulation" an oxymoron. Indeed, if rules are optional, there's no point in following them, which is exactly how Wall Street and the entire US political establishment, both Republicans and Democrats, like it. I might have been surprised hearing about this SEC "voluntary regulation" except for the fact that Bush, back when he was governor of Texas, used a similar phrase while introducing a plan for lowering the record levels of pollution produced by petrochemical plants on the Gulf Coast--clearly the White House employs "voluntary regulation" when they want nothing to happen.

I've railed away for years now about the cult of deregulation dominating Washington since the 90s and earlier. There's no point in going on about that right now especially because recent events have made it utterly clear to anyone without an impaired brain that we really do need to regulate business in some way shape or form. No need to beat a dead horse. At the moment, anyway.

But what's got me kind of amazed at the moment is how so many smart, well educated people, in government and in the private sector, could have been so fucking stupid for so long. Take a moment to consider all the years that deregulation mania has captured these people's imagination. You know, all the years we've heard economic debate reduced to "cut taxes" and "get the government off the people's backs" and all that crap. I mean, you know, sometimes it is a good idea to cut taxes or to streamline or eliminate absurd laws that have outlived their usefulness or were badly written in the first place--it's not as though there was never a nucleus of a good argument in all the hoopla from the get-go. But it seems like it's been years since the deregulators and tax cutters actually had to make that argument; it seems like it's all become such conventional wisdom that the establishment takes it as truth no matter what.

That is, lots of really smart people had come to believe that the market really is magic. Cutting taxes is like waving a wand. Deregulating is like saying "abracadabra." Really, public discourse on economics has, until very recently, become fucking retarded. And I swear to god, it appears as though the people who had the most to lose, the Wizards of Wall Street, started to believe in magic, too. How could they not know that extraordinarily risky investments, when spread throughout the entire investment world, could fuck up everyone? It really looks like they were counting on the Magic Market to make everything work out somehow.

This is the same mentality that brought down Enron--it's also probably the same mentality that's been inside the Oval Office for nearly eight years, too, but that's another discussion.

Anyway, what good are all those brains and educations if people refuse to use them? What good is all their expertise if they prefer to believe in fantasy, the supernatural powers of the market economy, over reality, of which they must be aware somewhere inside their magic addled brains? Is is possible that our entire ruling class is completely clueless? That's the really frightening thing about all this.