Fallout: The Financial Crisis

Reconsidering regulation

Kai Ryssdal Jan 2, 2009
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Fallout: The Financial Crisis

Reconsidering regulation

Kai Ryssdal Jan 2, 2009
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TEXT OF INTERVIEW

Kai Ryssdal: It’s not that the financial crisis came to pass because there were no rules on Wall Street. It’s that people — both in Washington and on Wall Street — decided the rules didn’t always apply. With the new Congress sure to consider fresh regulations for the financial industry, and soon too, we’ve asked Marketplace’s Steven Henn to recap what got us to this point.

Hey Steve.

Steve Henn: Hey.

Ryssdal: Amid all the finger pointing going on here, and there is plenty of it, one thing that comes up a lot is regulation, or the lack thereof. Give us a quick history lesson on how those rules got so lax.

Henn: You know, Joseph Stiglitz, the liberal Nobel Prize winning economist, says this all started back when Alan Greenspan was appointed to head up the Federal Reserve in the ’80s. Greenspan is, or at least was, a Libertarian — and for bankers, that was a little bit like having the chief regulator being a babysitter who lets you eat ice cream straight from the carton and jump on your parents’ bed. But the thing is, really, this goes much beyond Greenspan’s tenure at the Fed — he was just part of a much bigger trend. If you look back at decisions made in Congress or by the Clinton administration or at the SEC over the last 20 years, you know, Greenspan was just part of a deregulatory trend that reined regulators in consistently.

Ryssdal: Give us a couple of examples of specifics during that trend, though.

Henn: Well, there are a couple of big things. I mean, one of the most prominent was the repeal of the Glass-Stiegel Act in 1999. This was that Depression-era law that kept investment banks separate from commercial banks. The idea behind that law when it was passed, you know, 70 years ago, was that if you let these two types of banking institutions get together, they’d take risks that were too big and there would be all sorts of conflicts of interest. And frankly, since the repeal of Glass-Stiegel we’ve seen some of those problems occur. But there were also hundreds of smaller decisions that didn’t get a lot of attention at the time that, looking back on it now, played a big role in leading into the mess that we’re in. For example, in 2004 the SEC passed a rule that let investment banks dramatically increase their leverage. In retrospect, that looks like a really bad idea.

Ryssdal: And the point here being that this regulation, or move toward deregulation, comes across presidential administrations in both parties.

Henn: Yeah. Absolutely. I mean, it was President Clinton who declared the era of big government is over. And part of that was, you know, really sending a message that the government should have a light touch when it comes to the markets.

Ryssdal: You know this whole period has the feeling a little bit like right after Enron, when you knew Congress was working up some new rules and regulations. Where do you see that going as Congress comes back after the holidays?

Henn: Well, I think one of the first things that’s going to happen, and is already happening, is there’s going to be a lot more pressure on regulators to enforce the rules we already have. But there’s also going to be a push to rewrite some of the rules governing the financial industry. I mean, right now we have this incredibly fragmented system for banking regulation. You know, it’s an alphabet soup. There’s the OTS, the OCC, the SEC, the Fed. You know, this has created lots of cracks, and bankers can sort of shop around for the regulator with the lightest touch. I think one of the first things that’s going to happen is that Congress is going to look hard at creating, sort of, one big regulator that’s in charge of overseeing the entire system and its primary purpose will be to look out for big, systematic risks. You know, Congressman Frank says that he wants this regulator to rein in excessive risk taking, and it’s going to look at everything from hedge funds to investment banks to commercial banks.

Ryssdal: Congress is not the swiftest of beasts though, even in the best of times. How long is it going to take to see some of these new rules?

Henn: Well, Frank says he wants to get it all done by summer but, you know, we’ll have to wait and see. I’m sure the banking industry and their lobbyists here in Washington will have a lot to say about all of this, and I don’t expect that they’re just going to sort of tip-toe quietly into the night.

Ryssdal: Marketplace’s Steve Henn in Washington. Thanks a lot, Steve.

Henn: Thank you.

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