Wall Street regulation must be vigorous

Pepsi CEO Indra K. Nooyi was in town earlier this month and delivered a criticism of the recent Wall Street Reform Act, saying, “We cannot regulate ourselves into better business behavior.”

While I commend her push for better business behavior, we also know there must be active enforcement to ensure those changes. This would be a small problem if this were just an isolated speech.

It is not; rather it is just one part of a major campaign across the country to weaken the regulations currently being developed to enforce Dodd Frank Wall Street Reform.

The policy of “self-regulation” on Wall Street and elsewhere, which the country implemented during the last 20 years, resulted in the worst financial meltdown in 80 years, almost destroying the U.S. and world financial systems.

It caused more than 3 million homes to be repossessed, drove the unemployment rate over 10 percent, and left millions in economic, and emotional, shock.

Where was the regulatory backstop that should have been the last line of defense? Completely dismantled by Washington policymakers, who during the past two decades bought the view that self-regulation would work and markets could police themselves.

The question of whether regulation is necessary has been asked and answered, painfully so for many Americans. We are not living in the abstract, debating hypotheticals about what would happen without regulations.

Before the meltdown, market fundamentalists argued that our financial actors could police themselves, that their self-interest in remaining financially viable would create sufficient incentive to avoid failure — far exceeding the ability of regulators to limit excessive risk by rulemaking.

Systematically, these fundamentalists worked to dismantle many of the prudential New Deal era banking reforms.

Their crowning achievement: the repeal in 1999 of Glass-Steagall (which, passed in the aftermath of the Great Depression, kept our financial system stable and growing for 60 years).

Wall Street and Washington were possessed by this laissez faire ethos over the past 20 years. It was this philosophy, and the decisions that sprang from it, that led us blindly down the path to the financial crisis.

Even Alan Greenspan admitted that this dominant concept of self-regulation was ill-conceived. In a speech on Feb. 17, 2009, before the Economic Club of New York, the former Fed chairman conceded that the “enlightened self-interest” he had once assumed would ensure that Wall Street firms maintain a “buffer against insolvency” had failed.

Mr. Greenspan, perhaps more than anyone else, should have known better. But instead of playing the role of the markets’ fire chief, he played that of head cheerleader.

For example, Mr. Greenspan applauded the trend of financial disintermediation, proclaiming that new innovations would allow risks to be dispersed throughout the system.

Of course, this was just the tip of the iceberg.

Despite having the power to write and enforce consumer protection standards, the Federal Reserve did nothing to combat deteriorating origination standards in mortgage and consumer loans.

Mr. Greenspan signed off on regulations that gave banks the ability to set their own capital standards. He allowed banking institutions to leverage excessively by gorging on short-term liabilities and, in some cases, creating off-balance-sheet entities to warehouse their risky assets.

And now, Greenspan is at it again.

Just last month, he returned to his old talking points, joining the offensive coordinated by Wall Street banks and others saying that the Wall Street Reform Act will never work, and its implementing regulations should be delayed or watered down.

Trust alone will not work in business, just like it does not work in sports.

Many of us, as fans, are frustrated at the referees and umpires for constantly interfering with the free flow of the game. But they enforce the rules and regulations developed to keep the game orderly and protect the participants.

Perhaps a football game would go smoothly for a bit without referees, but I would not want to be at the bottom of the second or third pileup with no referee to enforce the rules.

Rebuilding effective regulatory policies and agencies will take time, but that work is absolutely essential. Not every business will follow the call to build trustworthy practices. Only the hammer of fair and consistent regulatory penalties and fraud laws will deter wrongdoers.

Originally published 17 Apr 2011 on delawareonline.com