Deregulation

Deregulation is only rational if human beings, especially businessmen, can be expected to act honestly, responsibly, and competently without regulation, oversight, and enforcement. Anyone who believes they will is either a creature recently arrived from a distant solar system or a fool. All of human history proves otherwise. Yet, the combination of deregulation and tax cuts has been the Republican mantra for decades. The folly of that mantra, was demonstrated by the administrations of Ronald Reagan, George H. W. Bush, and George W. Bush. They incurred the largest increases in the national debt in American history. George W. Bush caused unprecedented damage.

All three U.S. presidents of the 1920's were Republicans; Warren Harding, Calvin Coolidge, and Herbert Hoover. There was little or no regulation of the securities and banking industries. There was wide-spread fraud in the securities industry. According to the Securities and Exchange Commission (SEC), "It is estimated that of the $50 billion in new securities offered during this period, half became worthless." The lack of regulation also allowed commercial banks to speculate with depositors' money. The banks were also free to underwrite stocks and bonds. That pitted the banks' interests against those of the depositors, a clear conflict of interest.

Inevitably, the combination of insufficient regulation, oversight, and enforcement; wild speculation, irresponsibility by the banks, and fraud, resulted in economic disaster. In the last hour of trading on Wednesday, Oct. 23, 1929, stock prices dropped suddenly. Investors panicked. The next morning, "Black Thursday," the flood of sell orders overwhelmed the system. On Oct. 25, President Herbert Hoover said that "The fundamental business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis." He was wrong; just as Sen. John McCain was wrong 79 years later, then running for president, when he failed to understand that the economy was in free-fall and said "I still believe the fundamentals of our economy are strong." Hoover's statement did not reassure investors. On "Black Monday," Oct. 28, the stock market fell 22.6%, the worst decline in American history. The panic continued the next day, Thursday, Oct. 29. Investors tried to sell everything and sold a record number of shares; as many as the system could manage. "Black Thursday is considered to be the first day of the Great Depression."

During the week the market crashed, investors lost approximately $30 billion; the equivalent of more than $300 billion today. During the Great Depression, the unemployment rate reached 25%. It is estimated that more than 200,000 teenagers left home. Many of them rode the rails, living like hoboes. They were called "boxcar kids." Millions of children left school to work on farms, in factories and canneries. Many of them were chronically hungry and some starved to death.

During the administration of Franklin Delano Roosevelt, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 that created the Securities and Exchange Commission (SEC). According to the SEC Web site,

"The main purposes of these laws can be reduced to two common-sense notions:"

• Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
• People who sell and trade securities - brokers, dealers, and exchanges - must treat investors fairly and honestly, putting investors' interests first.

In 1933, Congress also passed the Glass-Steagall Act. The act prohibited commercial banks from underwriting securities and established the Federal Deposit Insurance Corporation (FDIC) which insured deposits.

These measures introduced stability to the financial system, reduced fraud, and increased the safety of deposits and investments. The system worked well for more than forty years. Whatever deficiencies existed could have been fixed without throwing out the baby with the bath water. Instead, starting in the 1960's, Democratic and Republican politicians and lobbyists began pushing for deregulation. One strong opponent to deregulation was Senator Phil Hart (D-MI). He warned that wealth and power were already concentrated in the hands of a small number of corporations and that deregulation would exacerbate the problem. His warnings went unheeded.

In 1978, President Jimmy Carter signed the Airline Deregulation Act of 1978. It gradually phased out economic regulation of the airlines over a period of years. The consequences included thousands of lost jobs, thousands of employees who lost pensions, medical benefits, and accidents. A detailed account can be read here.

In 1982, President Ronald Reagan signed the Garn-St. Germain Depository Institutions Act. It deregulated the savings and loan industry. He declared,

"This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions ..."

Reagan was wrong. The consequences of S&L deregulation are chronicled by the FDIC here. More than half of the S&L's failed and there were ultimately more than 1,000 felony convictions of S&L executives.

In 1991, Wendy Gramm, the chairwoman of the Commodity Futures Trading Commission (CFTC), promoted a rule protecting Enron, an energy trader, from government oversight of its energy futures contracts. Enron was a generous contributor to her husband, Sen. Phil Gramm (R-TX). In 1993, five weeks after resigning from the CFTC, she was appointed to Enron's board of directors. She served on the audit committee but later claimed she was unaware of the massive fraud in which Enron was engaged. On November 12, 1999 President Bill Clinton signed the Gramm-Leach-Bliley Act (GLB). It repealed part of the Glass-Steagall Act that for sixty-six years had restricted banks and financial institutions from engaging in conflict-of-interest activities and other types of misconduct. That deregulation would have disastrous consequences.

Phil Gramm was not finished fighting to dismantle the regulations that had protected the economy and investors for decades. In December of 2000, President Bill Clinton and Congress were struggling over a spending bill. Gramm inserted a 262-page addition titled the Commodity Futures Modernization Act. He explained that it would ensure that neither the SEC nor the CFTC would regulate new financial products called swaps and would thus "protect financial institutions from over-regulation." In 2002, internal Enron documents revealed that the company had helped write the Commodity Futures Modernization Act.

To their discredit, President Bill Clinton and some members of his administration bought into some aspects of the Republican delusion regarding deregulation. Unlike Republicans, however, they never saw deregulation as an article of faith to which one must adhere, regardless of the consequences. Democrats have been willing to change policies that do not work.

On August 31, 2001, President George W. Bush appointed Harvey Pitt, a Wall-Street insider, to head the SEC. Although his job was to regulate corporations, Pitt was a fervent advocate of laissez-faire capitalism; a belief that government should not regulate companies. His appointment was a clear signal to business that anything goes.

In 2000, Enron and Enron executives contributed hundreds of thousands of dollars to George W. Bush and Dick Cheney. Bush referred to Enron Chairman Kenneth Lay as "Kenny boy." Early in 2001, Lay and other Enron officials participated in several secret meetings with high Bush-administration officials, including Cheney, to set energy policy. Even as Enron's rampant fraud was being revealed, President George W. Bush and Vice-President Cheney vigorously defended Enron. Even they could not prevent the inevitable. Enron's house of cards, based on fraud, collapsed. Lay was convicted on six counts of fraud but died before he was sentenced. Jeffrey Skilling, the president of Enron was convicted of multiple felonies and sentenced to twenty-four years in prison. Twelve-thousand employees lost their jobs and 401(k) savings. Investors, including pension funds, lost tens of billions of dollars.

Enron was only one of the major companies that engaged in massive fraud during the Bush administration. Worldcom was found guilty of an accounting fraud that cost investors billions. Bernard Ebbers, the CEO, was sentenced to twenty-five years in prison.

Dennis Kozlowski, the CEO, and Mark Swartz, the CFO of Tyco International, were convicted on twenty-two felony counts, including grand larceny and accounting fraud. They both were sentenced eight to twenty-five years in prison.

Adelphia was once the fifth-largest cable company. In 2005, John Rigas, the founder and CEO, was sentenced to fifteen years in prison for a multi-billion-dollar fraud that caused the company to fail. His son Timothy, the CFO, was sentenced to twenty years in prison.

In 1997, the Justice Department announced that it was investigating Columbia/HCA, a health care company started by Rick Scott, the CEO, for what turned out to be the largest health care fraud case in American history. Scott resigned four months later. Among the charges against Columbia/HCA was that it "... engaged in a series of schemes to defraud Medicare, Medicaid and TRICARE, the military's health care program ..."  Ultimately, Columbia/HCA plead guilty to fourteen corporate felonies and paid $1.7 billion in fines. On July 27, 2000, Scott was questioned in a civil suit against Columbia/HCA, the company he created and ran. He replied by invoking the fifth amendment 75 times. On Nov. 2, 2010, Rick Scott, running as a Republican, was elected Governor of Florida by a 1% margin.

Exploiting insufficient and unenforced regulations and lack of oversight, companies in other fields, including health care and pharmaceuticals, defrauded and endangered the public. A separate essay provides a partial account of the rampant fraud in the health care and pharmaceutical industries.

In 2013 and 2014, some of the largest financial institutions in America agreed to pay multi-billion-dollar penalties for misconduct in the mortgage business. The officials of those companies hoped to avoid criminal prosecution.

On November 19, 2013, JPMorgan Chase agreed to pay $13 billion.

On July 14, 2014, Citigroup agreed to pay $7 billion in a deal with the Justice Department regarding the misrepresentations about mortgage-backed securities that the bank sold to investors. According to Attorney General Eric H. Holder Jr., "The bank's misconduct was egregious." Such malfeasance, in which many banks engaged, was a major contributor to the financial crisis of 2008.

On August 21, 2014, Bank of America agreed to $16.65 billion in a deal with the Justice Department regarding misconduct in mortgage sales on the part of Countrywide Financial which Bank of America bought in 2008.

As it had in the 1920's deregulation allowed irresponsible and fraudulent business practices that resulted in disaster. Consumers were cheated and tens of thousands of employees lost their jobs. The perpetrators got richer. Deregulation, along with tax policy that had previously failed, led to the collapse of the economy. Millions lost their jobs, homes, and savings. Republicans want to continue the same policies.

During my late-night research, I might have copied text from another author and inadvertently forgotten to give credit. Please let me know if you find instances of such negligence and I will correct it promptly. I welcome all corrections of facts, spellings, grammar and broken links.