Saturday, September 27, 2008

S.E.C. Chairman Chistopher Cox: “Voluntary Regulation Does Not Work.” Democurmudgeon says, “No S**t.”

Perhaps the Republican Party could force themselves to pick up the liberal propaganda attack machine, the NY Times, and learn a little something that could change their approach to the failed theory of unfettered capitalism.

Naw, that’ll never happen, but it was fun to imagine. Here are the facts most conservative nut jobs will want to avoid:

The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

For many average citizens like me, the "voluntary" nature of a program overseeing corporate profits seemed crazy to begin with. A Simple idiot could tell you it wasn't going to work, but then again, most of us out here in normal America are just whiners anyway.

On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.

Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

The commission created the program after heavy lobbying for the plan from all five big investment banks. The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.

Facing the worst financial crisis since the Great Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets.

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms.

The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.

There's also another important aspect of the economic crisis, as explained at

The ongoing financial crisis in the U.S. has occasioned plenty of finger pointing. Some blame reckless mortgage brokers; others greedy financial institutions; and still others lax regulators.
Carl Feuer, a spokesman for
UAW Local 2300, sees it slightly differently. According to him, the real cause of the crisis is the
falling standard of living of the American worker.

As prices for food, gasoline, and health care rise even as wages stagnate or fall, many households have been unable to make their mortgage payments. Defaults, and foreclosures, were the inevitable result. The losses suffered by banks and other financial institutions are currently making the biggest headlines, but it’s important to remember where the problem started.

Feuer has a point. If average Americans weren’t in a financial bind they wouldn’t be defaulting on their mortgages. Or at least fewer of them would be in default. Still, a lot of the blame must nonetheless be placed on the financial system. Reckless lending practices made unaffordable mortgages too easy to obtain, which resulted in many unwise home purchases, which drove up real estate prices, forcing even prudent people to spend more on housing then they wanted to, thus creating a vicious circle. Now that the circle has come to an end, we’re all paying the price.

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