European politicians want a global financial superregulator

Let's not get carried away with our Sovernity

By Melvin J. Howard

As the Obama administration is enacting new banking and financial rules. I want to review the last time we had massive financial failures it was back in the Great Depression. Then like now numerous regulatory laws were enacted. Let's take a look at four of them closely and see where we are today with them:

• Utilities Regulation: In 1935 the Public Utilities Holding Company Act or PUHCA was introduced to provide national supervision of the gas and electricity utilities in order to prevent their excesses of the 1920s. In the twenties big utilities had been buying up smaller ones, hiking up consumer prices, expanding into unrelated businesses, loading up on debt, hiding losses from investors, and milking their subsidiaries and affiliates to prop up their own earnings. Sound familiar? Various exemptions from it amidst recent recommendations by everyone from the Senate Banking Committee to the SEC to have this law repealed.                     

Think “ Enron “

• Exchange and Accounting Regulation: The Securities and Exchange Commission (or SEC) was established in 1934 under the Securities Exchange Act. During the 1920s there was effectively no Federal oversight of the securities markets, and with the market rising in the 1920s, and banks more than willing to lend for stock speculation, this created a recipe for disaster. The SEC was created to oversee market players in the securities markets and to require truthful quarterly reporting from publicly traded companies. By 2002 the effectiveness of the SEC in enforcing "truth in reporting" has come with mixed results. This is in part due to conflicts of interest  throughout the financial world but also due the sheer complexity of financial transactions available to all companies and the absence of regulation on the most risky of financial transactions - those called derivatives trades.

    

Think  " LTC and Bernard Madoff"

• The Social Security Act: Before the Great Depression there was no federal safety net for unemployed, disabled or retired persons. As often happens today the safety net was usually picked up by various charities and religious organizations. But this safety net collapsed during the Great Depression because of the collapse in confidence in the financial system. By necessity and through public pressure that had built up over the years the Social Security Act was born in 1935 and provided for old-age and unemployment benefits. Today, of course, this depression era safeguard is under attack with financial companies. 

Think “ Privatization “

• The Heart of the Financial System: Finally the big one - the regulation of the system that stands at the heart of the entire financial infrastructure - the banking system. The big act affecting the banks and securities dealers was the Glass - Steagall Act of 1933 that brought radical changes and better supervision to the banking industry. This act separated deposit banks, where depositors expect to safely park their money, from more speculative players such as securities dealers and investment banks that could make depositors' money disappear through careless gambling - and did exactly this in the 1920s. The Federal Depository Insurance Corporation or FDIC was set up in 1933 to provide insurance on depositors' funds in the event of bank failure. This was necessary to restore confidence in the foundations of the monetary system - the banks - that had just seen run after run, failure after failure, and depositors had seen their money disappear right before their very eyes.

Interestingly, also at this time, various controls and regulations were put on the Savings and Loans institutions. This was undone when Ronald Reagan began his de-regulation kick in the 1980s. As we now know the undoing of these regulatory checks and balances precipitated in the Savings and Loans debacle of the 1980s that could have brought down the world financial system then, except that the US taxpayer saved the day with a high priced bailout. That is what Federal Insurance means - backed by the US taxpayer. With the repeal of Glass-Steagall protections in 1999 nobody seamed to have remembered the lessons of the 1980s, let alone the lessons of the 1920s!
The banking system the heart and soul of the financial system. The gradual dismantling of these regulations over the past 20 years, since Ronald Reagan took office in 1980 and culminating in the complete repeal of the Glass - Steagall Act in 1999, is sending in my opinion the banks straight back to their 1929 former selves. What are the results of this? Banks were able to form big banking and securities trading conglomerates after the repeal of Glass – Steagall Act.
Washington Mutual, with $307 billion in assets, is by far the biggest bank failure in history, eclipsing the 1984 failure of Continental Illinois National Bank and Trust in Chicago, an event that presaged the savings and loan crisis. IndyMac, which was seized by regulators in July, was one-tenth the size of WaMu. In summary we have had massive bank failures. So do we need more regulation maybe for unregulated funds and new financial instruments? But we can enact a thousands new laws and it will do no good if we keep repealing and don’t mind the ones we already have.