How Did We Get Here? September 29, 2008

How Did We Get Here?

For those trying to figure out how we got into the current credit crisis, one doesn’t have to go back to the historical factors leading up to The Great Depression, but to a few months after September 11, 2001. Remember Enron and WorldCom, at the time two of the nation’s biggest corporation? Much has been written on the decline in corporate ethics and the collapse of the 1990’s bull market. Daniel Quinn Mills wrote about these times in his 2005 book, Wheel, Deal, and Steal; “The great irony is that the top corporate executives, bankers, accountants and attorneys, all supposedly committed to American Capitalism, have in fact spent the past decade doing the best to undermine it.” Mills went on to state the importance of honest information in order for free markets to work. “This is well known to corporate executives and financial professionals, yet they have assiduously sought to misrepresent and conceal information.” Knowing this, we continue to perceive banks as honest players in the flow of money in the credit system, which reflects the inescapable theme of our time, the erosion of memory and knowledge. (Susan Jacoby, 2008)

An October 7, 2002, BusinessWeek wrote an analysis designed to answer the 2002 economic downturn, identifying factors still at play in the current financial crisis, not the least of which was the 1999 repeal of the Depress-era Glass-Steagall Act. Now, as then, factors such as the resale of loans, less scrutiny of risky borrowers and the failure of regulators to fix systemic credit problems once the debt in the market continue to anguish the financial system.. Worse, Congress has routinely under-funded the regulatory agencies and wrote laws providing incentives for executives to cheat their own investors. (Greg Farrell, 2005) As did Mills, Greg Farrell, saw the Enron demise as just the tip of the iceberg of things to come in the market place. In his book, America Robbed Blind, Farrell made the following recommendations to help fix the problem (pp. 180-181)

1. Allow the SEC to keep the fees it currently collects from public companies. Self-funding would protect the financial health of the commission from the whims of its Congressional overlords, and allow the SEC to grow at the same rate as the financial markets it polices.

2. Give SEC attorneys’ criminal enforcement powers.

3. Give bonuses to successful SEC attorneys. Plaintiff’s lawyers who bring cases against tobacco companies and asbestos manufacturers put years of effort into the cause because if they win, the financial payoff is astronomical. But an SEC lawyer has almost no incentive to take on difficult cases where the commission is outgunned by a public company’s army of lawyers.

Congress should consider these and other safeguards to any future failures of regulatory agencies to protect the American financial system. At this writing, the House vote on the legislation designed to rescue the troubled financial system has failed. Apparently, if this is the message the American people are sending their representatives, they must understand this very complicated crisis better than those in change of regulating the financial system. Based on the premise that “…Americans don’t have the time to sift through mountains of corporate filings or detailed financial reports laden with accounting jargon and legalese,” Farrell wrote his book to make it easier to understand such issues so that these abuses never occur again. Apparently, the American voter doesn’t need help. (Greg Farrell, 2005)

Maybe what we are witnessing today is just another example of dumbness and smartness being defined downward — “Not only basic knowledge but the ability to think critically are required to understand the factual errors (as distinct from differences of opinion) that generally provide the foundation for policies at the far ends of the political spectrum.” (Susan Jacoby. 2008)

kenne

P.S. I’m pleased that my Congressman, Kevin Brady, 8th District of Texas, voted for the credit cresis bill that failed before Congress today. A couple of other items to possibly help put things in perspective — The market lost over one trillion dollars today and close at a level lower than it was when George W. Bush took office eight years ago! Think about it!