Tomorrow, the Financial Crisis Inquiry Commission releases its 576-page tome on what caused the U.S.-originated financial crisis that triggered the Great Recession. Not surprisingly, it largely faults inept and complaisant regulators. Among the cast of incompetents and worse: Regulatory officials Alan Greenspan, Ben Bernanke, Hank Paulson Jr., Tim Geithner, Bill Clinton, Phil Gramm and top dogs at the SEC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the U.S. Fed and the New York Fed. That is not a complete list.
The biggest mistake - again, no surprise for students of history - is that it was wrong to trust that the private sector, in this case the financial-services industry - would exercise sufficient prudence without adequate regulatory supervision. And the pols and regulators were well paid to turn away from dodgy practices they should have outlawed. As the NYT reports, "the financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals affiliated with it made [an additional] $1 billion in campaign contributions."
In a more perfect world, say, the early FDR years, that president excoriated the "rulers of the exchange of mankind's goods, [who] have failed through their own stubbornness and incompetence, have admitted to their failure, and have abdicated." FDR was backed up by the sordid findings of the Pecora inquiry, still the only thorough examination of Wall Street's widely destructive self-interest when left to its own devices. Obama, while expressing annoyance at execessive pay for "fat-cat" bankers, has forsaken an entirely appropriate populist castigation of the dread spawn of Crash of '29, and been pilloried as a "class warrior" every time he dares raise the subject. A shame, because this was one of Obama's "teachable moments" if ever there was one.
Imagine a zoo with the bars removed, and that's the private sector without able and honest regulators.
Lax or non-regulation was the principal cause of the loss of a great American city, in the aftermath of Hurricane Katrina in 2005. FEMA's own internal watchdog, the inspector general of Homeland Security, said the post-Katrina criticism of FEMA was largely deserved.
Just days before the Upper Big Branch Mine disaster of last year, in which 29 miners were killed in the worst U.S. coal-mining tragedy in 40 years, the U.S. Department of Labor issued a report titled "Journeymen Inspectors Do Not Receive Required Periodic Training." Davitt McAteer, former head of the Mine Safety and Health Administration, couldn't believe in the aftermath of the 2006 Sago mine disaster - another case of excess methane levels triggering a fatal explosion - lessons had not been learned and applied to the 56 mines operated by Massey Energy, a chronic violator of safety regulations. "We know how to remove methane and control dust problems and the fact that we had [another] explosion with methane or dust suggests we are not doing enough to protect miners."
A few weeks later last year, BP's offshire exploration rig in the Gulf of Mexico, the Deepwater Horizon, capsized and sunk, triggering one of the biggest environmental disasters in U.S. history. Turns out the Interior Department - Obama's Interior Department, headed by the industry friendly pol Ken Salazar - had issued an exemption for the Deepwater Horizon project from a detailed environmental impact analysis. Which would have found that BP had taken no special precautions in drilling the deepest well ever in Gulf history, that no tests had been done worldwide to show that a blow-out preventer would work at that unprecedented depth (it didn't), or the shoreline impact given that the project was located extraordinarily close to the Gulf Coast.
But then, BP had spent millions in extensive lobbying to get waivers from those regulatory requirements. And an industry friendly Minerals Management Service (MMS) branch of Salazar's Interior Department was all to easily swayed by BP's assurance that it knew what it was doing.
Obama, the story goes, dispatched Salazar to the MMS's offshore-drilling headquarters to "sweep the stables" clean of the well-known corrupting influences of industry there. Salazar gave the place the once-over, delivered a pep talk, and wasn't heard from again. It disappoints me now end that Obama didn't sack Salazar last summer, and that indeed he is still in cabinet.
The bottom line is epic disasters - like an unsupervised greed on Wall Street that cost 8 million Americans and 400,000 Canadians their jobs - usually have inadequate or corrputed regulation as a root cause.
I wish we had no need of regulators. As a taxpayer, I would love to save that expense. But then I'd have to hope I could count on good behavior from the private sector. And whether its violations of employment laws at Wal-Mart or a deadly listeria outbreak that kills consumers at Maple Leaf Foods or faulty tires on Ford Explorers in deadly accidents or unregulated mortgage brokers peddling toxic subprimes to unsuspecting, starry-eyed prospective homebuyers, red tape is not what ails our economy. What ails our society is (a) private-sector willingness to slip into immoral behavior and (b) insufficient vigor by "public stewards" (of our financial system, as the FCIC report will say tomorrow) in curbing the anti-social conduct of business.
"Gresham's Law," dating from the mercantilism era, has it that bad money drives out good. It is the same with modern business behavior. Chuck Prince, the hapless, since fired, CEO of Citigroup, which remains on U.S. government life support, famously said at the height of the recklessness that if all your peers are dancing to the devil's tune, you are obliged to as well.
Yes, we are talking about lemmings, bearing the imprimatur of degrees in finance from Wharton, and in the case of the epic failure of Long-Term Capital Management LP, not one but two Nobel laureates in economics sitting on the board of directors.
Lack of robust regulation. Let's resolve either to get rid of the cost of the regulatory apparatus, including the undeniable red tape, and take our chances on the law of the jungle. Or get serious about guarding the public's interest - which, by the way, is in the best interest of business itself - and settle for nothing less than adequately staffed and trained and incorruptible public-servant regulators.
Looking back on these four miserable episodes is to recall Edna St. Vincent Millay's adage: "Life is not one damned thing after another. It's the same damned thing, over and over."
Or as my dad said, "People always have to learn the hard way."