How Should We Clean Up the Mess on Wall Street?
The high flyers of corporate America have had their wings clipped before with effective regulation. However, history shows that"muckraking," revealing scandals and even mobilizing public opinion through mass media, has never been enough in itself to achieve regulatory reforms.
In the early 20th century, magazines aimed at a new white collar middle-class audience unearthed corporate scandals and reported spectacular examples of business arrogance. Yet, anti-Trust legislation languished in Congress for years, as Republican Senate leader Nelson Aldrich, John D. Rockefeller's son-in-law, blocked legislation to lower tariffs, and created legislation to increase the power of large investment banks. Only a division in the Republican party: a three way race for the presidency in 1912 with Progressive party candidate Theodore Roosevelt running second and the election of Democrat Woodrow Wilson with a solid congressional majority broke the stalemate and led to the establishment of the Federal Trade Commission and the Federal Reserve Board.
Of course, the powers of the new regulatory commissions were limited and the courts remained in the hands of conservatives solicitous of the rights of Big Business and protectors of the principle of Freedom of Contract. In the 1920s, with an almost religious intensity represented by Calvin Coolidge's pious proclamation,"the business of America is business. He who builds a factory builds a temple, he who works there, worships there," conservative Republicans staffed regulatory agencies with militant opponents of regulation and made the trickle-down theory of detaxation, deregulation, and privatization preached by Secretary of the Treasury Andrew Mellon into national policy. The idea, as Coolidge's predecessor, Warren Harding said, was to get government out of business and make government work like a business, an idea which carried the day until the Great Crash, but then flew or jumped out the window with a number of prominent brokers, bankers and big business executives. In the economic carnage which followed, the Dow Jones average dropped by 92% from its peak, unemployment reached somewhere between 25% and 38% of the work force at its peak (the lower figure comes from the Hoover administration) and salaries and wages dropped far more than prices, leading to a steep decline in purchasing power and living standards for the great majority of people who were able to hold unto their jobs.
The result of course was the New Deal, which provided an answer to Herbert Hoover's robotic refrain that the"economy is fundamentally sound," a phrase recently revived by George W. Bush, as everything crashed around him.
Perhaps now is the time for the kind of radical changes the New Deal instituted when it established the Securities and Exchange Commission (SEC) in 1934. The Securities Exchange Act compelled publically traded firms to provide listings of their assets and liabilities. It also outlawed various practices used to manipulate stock prices for speculative purposes.
The legislation of the 1930s, including the Banking Act of 1933, which established the Federal Deposit Insurance Commission and subsequent banking legislation that divorced investment and commercial banking, protected the savings of millions of small depositors and barred the sort of stock market speculation by banks that caused thousands of banks to collapse in the early 1930s. The measures passed only after tens of millions of people voted for political leadership committed to changing an economic system that had led to mass unemployment and a huge decline in living standards.
As a result, FDR rallied the people, denouncing the leaders of industry and finance who resisted regulation and reform as"Economic Royalists." He supported the growth of trade unions to balance employers power, established old age pensions, unemployment insurance, and other social protections for the people.
Those regulatory reforms were successful, even though the new regulatory agencies were often staffed with appointees who were much more sympathetic to business interests than the original New Dealers. Although it took World War II to really revive the economy, real wages rose sharply from the 1940s to the 1970s and unemployment didn't reach ten percent until the first years of the Reagan administration.
The present crisis stems from the successful weakening of the New Deal reforms in recent decades. Roosevelt had, in an attempt to save capitalism from itself, demonized corporate arrogance and business greed. Fifty years later, President Ronald Reagan directed the deregulation of energy, public utilities, banking, and finance while demonizing welfare recipients. He sharply reduced federal funding for a wide variety of social welfare and education programs. Reagan revived Andrew Mellon's long discredited"trickle down theory of the 1920s and even used social-religious conservatism, in campaigns against abortion rights and for"family values," in much the same way that 1920s conservatives had used religious fundamentalism, prohibition, even attempts to bar women from wearing short skirts in public to divide people along urban-rural and ethnic religious lines while the economy stagnated and inequality grew spectactularly.
First of all, Reagan, in the name of"supply-side economics," aggressively deregulated industry, sharply reduced environmental regulation, and staffed regulatory agencies with men and women who held the views of Secretary of the Interior James Watt, who famously said,"there are two kinds of people in this country, liberals and Americans." Reagan also reduced discretionary social spending in the first years of his administration by one hundred billion dollars.
The result was the worst recession since the 1930s with unemployment reaching a peak of 11% in 1982. The administration then used massive military spending,"military Keynesianism" as historian Richard Hofstadter had called it earlier in the 1950s, to spend its way out of the recession it created, and floated along on a politics of make-believe, busting unions, destroying public housing, bailing out a scandal-ridden savings and loan system that its policies created, and maintaining its popularity as deficits tripled, poverty and crime grew, and voter participation dropped to the point that the top 20% of income earners, who in general did benefit from a rising stock market and the detaxation policies of Reagan, often constituted a majority of the electorate in off-year congressional elections and state and local elections. David Stockman, Reagan's Budget Director and an important architect of his early policies, summed it up subsequently when he said the economy had become an"utter, mind-numbing disaster."
But, even with the crash of 1987, the money didn't stop flowing as it had in 1929. The New Deal social policies and regulatory reforms that Reagan did so much to weaken, as Paul Volcker was to note sarcastically, saved the stock market debacle from turning into a major depression. Thanks to the"entitlements" (social security, minimum wages, unemployment insurance) Reagan condemned, the FDIC system and the Federal Reserve, he avoided the fate of Herbert Hoover.
In effect, Reagan transformed generations of criticism against the abuses of"big business," which had produced regulatory reforms, into a generation of criticism against"big government." The administration of George H. W. Bush continued these policies, even though runaway deficits compelled it to raise taxes. The Clinton administration did little to reregulate business and joined with Republicans to eliminate much of the New Deal's federal welfare program, Aid to Families with Dependent Children (AFDC), in 1996. Before the present embarrassment from corporate corruption and bankruptcies, the current Bush administration was intent on returning to hard-line Reaganism.
The current scandals, the billions extorted from California for electricity, and the Enron and WorldCom stock and accounting swindles, are the result of deregulation. They are evidence that deregulation is part of the problem, not part of the solution to maintaining a healthy and stable economy.
A national energy policy, based on regional versions of the Tennessee Valley Authority (TVA),which produced public power on a regional basis in cooperation with local communities, would have prevented the energy speculation that produced such a disaster for California. FDR and the National Resources Planning Board, a New Deal agency, saw such a policy as a long-range goal in the 1930s. Strengthening the Federal Trade Commission and the Securities and Exchange Commission to outlaw the shady mergers and self-serving accounting practices that has turned the stock market into a great engine of speculation would make CEOs return to policies fostering productive long-term growth to provide dividends for shareholders rather than raising short-term stock prices at all costs.
If we are really at war, or involved in an open-ended"war against terrorism", as the Bush administration regularly reminds us, reviving FDR's World War II proposal for an income cap on high executives, brokers, and bankers would deter business leaders from acting like Robber Barons and creating more Enrons, just as team salary caps in professional sports have tried to keep greedy owners from destroying competition and inflating costs to everyone. Finally, seriously considering public ownership of industries undermined by corporate corruption would serve as a powerful deterrent to those board room operators who will try to circumvent any system of regulation.
The U.S. has never fought a war with tax cuts for the rich and corporations and a call for weak, decentralized national government. Given his overall policies, President Bush's indignant recent statements against the corporate scandals remind me of Louis, the police chief played by Claude Rains in the movie"Casablanca," announcing that he is shocked, shocked that gambling exists on the premises of Rick's Café while he instructs underlings to gather up his winnings before he temporarily closes down the place.
Turning a blind eye to corporate profiteers is destabilizing the economy. In the present situation, serious change means radical change in government's relationship to business.
This piece was distributed for non-exclusive use by the History News Service, an informal syndicate of professional historians who seek to improve the public's understanding of current events by setting these events in their historical contexts. The article may be republished as long as both the author and the History News Service are clearly credited.
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Rogelio F. Arteaga - 8/6/2002
If, Mr. Rollins, you understood all of Professor Markewitz’s points then why this: “Markowitz says that the growth of trade unions, old age pensions, unemployment insurance, and social protections are regulatory reforms. Really? what do they regulate?” Is that not confusion?
You disagree with the idea that deregulation is the cause of all the accounting shenanigans that have come to light. I happen to disagree with your disagreement. That’s fine. Reasonable people can see a problem from different perspectives.
Your solution for all this is: “...establish a uniform set of standards and practices for accounting (simuliar to the CPA's) that carry a stiff penalty for non-compliance. The already existing IRS could assume the enforcement role.”
That is a proposal worthy of consideration. Isn’t the IRS a government agency, though? Isn’t that, then, “government intrusion”?
Now look at Professor Markewitz’s approach: “Strengthening the Federal Trade Commission and the Securities and Exchange Commission to outlaw the shady mergers and self-serving accounting practices that has turned the stock market into a great engine of speculation would make CEOs return to policies fostering productive long-term growth to provide dividends for shareholders rather than raising short-term stock prices at all costs.”
As you can see, both of you advocate the use of existing federal agencies to “intrude” on the “private sector economy”.
But why should the government be so intrusive? I think the answer lies in your reply to me: “The current crisis is the result of a lack of ethics and honesty. Every decade has its share of hucksters and swindlers in every aspect of the economy. Every industry has dishonest people who will do anything to make a buck. The con changes from generation to generation but the underlying principle is the same: Take what you can while the going is good.”
No one could have said it any better, Mr. Rollins. It is why I said: “Our faith in business should resemble that of our faith in government. Mix it with a lot of oversight.”
As to the issue of money and devaluation... In your first contribution here, you quoted Professor Markewitz as follows: "Thanks to the "entitlements" (social security, minimum wages, unemployment insurance) Reagan condemned, the FDIC system and the Federal Reserve, he avoided the fate of Herbert Hoover."
Then you asked: “Oh really explain how!!!! (entitlements are a liability not an asset).” I merely pointed out to you the professor’s quotation used to support his point.
Michael P. Rollins - 8/6/2002
First off Mr. Arteaga, I can assure you I understand all of Markowitz's ode to government expansion and intrusion into the private sector economy. His article calls for more of the same: Big Government Bureaucracy and highter taxes to pay for it all. I take issue with the point Markowitz makes and you seem to agree with, that is that this current crisis facing corporate America is the result of weakening New Deal reforms. This is not true. The current crisis is the result of a lack of ethics and honesty. Every decade has its share of hucksters and swindlers in every aspect of the economy. Every industry has dishonest people who will do anything to make a buck. The con changes from generation to generation but the underlying principle is the same: Take what you can while the going is good. The current crisis involves accounting procedures, the solution to this is to establish a uniform set of standards and practices for accounting (simuliar to the CPA's) that carry a stiff penalty for non-compliance. The already existing IRS could assume the enforcement role. The alternative-creating a government agency to regulate human behavior to ensure honesty.
My original distaste for Markowitz's article on "How to Clean up The Mess on Wall Street" stands- it is long on socio-political diatribe short on economic fact and principle. The mess is not Wall Streets to fix it belongs to those who lied about their company's position in the marketplace. One final note Mr. Arteaga, the money supply did not stop flowing in 1929 after the October crash but rather lost value (deflation). Several "sucker rallies led some investors to believe the market was coming back. The run on the banks began in the winter of 1930. Even then money continued to change hands. Surprisingly even in depressions money continues to flow- its economics 101!!!
Rogelio F. Arteaga - 8/3/2002
Here are some points for Mr. Tabaska and Mr. Rollins to consider.
First, Bush’s scholarly mediocrity -- our concern is with what it symbolizes: an appalling ignorance of the world around him. There are many examples of this, but I’ll just offer one: his use of the word “crusade”. A well-educated president would have avoided it (in the context of Bush’s speech last fall) because he would have been aware of its historical significance.
It is true that Lincoln is considered a better president than Wilson. But Wilson is considered to be among the better presidents in our history all the same. I think most of us prefer our chief executives to be intellectually curious, therefore, well-informed.
Now to Wall Street. Mr. Tabaska correctly points to the large role Smoot-Hawley played in the fall of our economy. But from that he insinuates that government involvement per se has “a negative effect” on the economy. The positive effects of the Banking Act of 1933 and the SEC contradict him. Both helped to restore Americans’ confidence in the banking system and in Wall Street.
Mr. Rollins had difficulty understanding some of Professor Markowitz’s points. For instance, he claims the theme of the article is “FDR GOOD, Reagan Bad.” No, his theme is here: “The present crisis stems from the successful weakening of the New Deal reforms in recent decades.” The issue is the role of government and business in a capitalistic society. Therein lies the chasm that separates liberals and conservatives. FDR and Reagan simply serve as the most prominent role models for each.
Mr. Rollins claims: “Markowitz says that the growth of trade unions, old age pensions, unemployment insurance, and social protections are regulatory reforms.” No. he doesn’t. First, he discusses the regulatory reforms (the Banking Act and the SEC). Then he says this: “As a result, FDR rallied the people, denouncing the leaders of industry and finance... He supported the growth of trade unions to balance employers power, established old age pensions, unemployment insurance, and other social protections for the people.” Then, in the next paragraph, he resumes his discussion of the regulatory reforms.
Mr. Rollins disputes this comment, “Thanks to the ‘entitlements’ (social security, minimum wages, unemployment insurance) Reagan condemned, the FDIC system and the Federal Reserve, he avoided the fate of Herbert Hoover.” He doubts this because, “entitlements are a liability not an asset.” Here's how entitlements helped: “But, even with the crash of 1987, the money didn't stop flowing as it had in 1929.”
I agree with the professor. To expect business to regulate itself is folly. Our current mess proves that. To expect the consumer to weed out businesses offering faulty or dangerous products ignores the reality that many of those businesses remain active and prosperous for decades. To expect a business -- when forced to choose between profits or the public’s interest -- to decide in the public’s favor is unrealistic. Many of the safety reforms now being taken seriously by the airline industry were summarily brushed aside as too costly when first presented some thirty years ago.
Our faith in business should resemble that of our faith in government. Mix it with a lot of oversight.
norman markowitz - 8/3/2002
In response to Mr. Rollins, who is of course entitled to his opinions as we all are, even none economists with Ph.Ds in history of 32 years duration, like myself, what Reagan called "entitlements" are regarded as social income, or rights in most of the civilized world. They provide for a more skilled labor force, increase in a more equal way mass purchasing power and produce both a more efficient and certainly more egalitarian economy, which is why the U.S. did best by far in the 1950s and 1960s when social incomes were rising along with money incomes and the system of taxation was much more equitable. As for "public ownership," that means public sector, not companies that are traded on the stock market. Calling these firms examples of public ownership is like calling Pakistan a Democracy. Finally, if people weren't fighting each other in the 1920s over drinking, religions, and sexual morality, they might have noticed how union busting, underconsumption, rural despression, stock market speculation, etc., was leading the country to disaster, just as they might have seen the disastrous consequences of the Reagan policies, making the U.S. the leading importer of capital, quadrupling the national debt in the Reagan Bush era, opening up the country to imports produced by cheap labor in the enterprise zones of the world, had they not been fighting each other over religion, abortion rights, gay rights, etc.
Mr. Traska's points are more thoughtful. I would respond that the deregulation, besides creating the conditions for the Savings and Loan and Insider Trading scandals of the 1980s, undermined the SEC and undermined regulatory agencies generally, which were also underfunded. The tech firms "grew up" in a political-economic atmosphere in which they could get away with these practices and did for a long time. Unlike postwar firms like Zerox, for example, or even an old fashioned great monopoly like Microsoft, they were all about speculation.
Finally, Mr. Traska, even though I never met a payroll, as old guard Republicans liked to say or sold my interest in a major league baseball team for dozens of times what I purchased it for(If my father was president of the U.S. that might not have been true) I am sure I could easily get a higher score than George W. Bush on the sort of standardized tests he emphasizes in his education progam, which of course wouldn't make me a better or worse president.(I suspect that a significant section of the population could also). Abraham Lincoln was a self-educated man with a hunger for knowledge who studied basic works, learned much from them, and applied them. In many ways he was more of an intellectual than Woodrow Wilson. From everything one has read about him, George W. Bush is a classic country club Republican whose highest ambition, before him became governor of Texas, was to be Commissioner of Baseball(a game I love) and, initially expecting to lose to Anne Richards, he ran for governor of Texas in 1994 in the hope that it would be a stepping stone to becoming Commissioner of Baseball.
Governor of Texas in 1994 initially in the
Michael P. Rollins - 8/2/2002
Is it just me or are there other readers with extensive backgrounds in Business and Economics that read articles like Norman Markowitz's and just scratch their heads and say "WHAA!!!?? The article is long on diatribe short on economic fact and reasoning. I label it a diatribe because it has just one theme that it wants to get across: FDR GOOD, Reagan Bad. If Markowitz has an axe to grind with Reagan fine come right out and state it, don't try to massage facts and figures like a Anderson accountant in hopes of winning over converts. Like most with no economic background Markowitz is enthralled and head over heals in love with FDR and the New Deal. Lets be honest if one had to chose between living in America with the economy of the New Deal vs. living in America at Reagan's time a majority of American's would be opting to live in the 80's. Markowitz is continuing a trend I see alot today; historians who gamble that their audience is either too young to remember or too ignorant to seek historical text reference outside the classroom. Far too often professors feel free to act like experts outside their field of concentration hoping the PhD. attached to their name will be intimidating enough to deflect criticism.
There was much wrong with Markowitz's article and it would take far too long to rebut each and every false and misleading statement. I will stick to rebutting the flaws in logic and economic thinking.
First the article is titled "How should we clean up the mess on Wall Street?" He then goes on to great lengths to blame Reagan for all that has gone on in this world since FDR's passing. I have to ask this: Is the mess on Wall Street or is it in the offices of Corporate CEO's and Accounting Firms they contract to work for them. Let me see if I have this right, a company's CEO lies to the general public and their accounting firm backs their play and it is all Wall Steets fault? Company's are listed on the Stock exchange and their price is based on a number of factors, accurate corporate reporting being one of the most key elements. Maybe a uniform set of accounting standards and practices with harsh penalties for non compliance migh do the trick. I'm sure there is a New Dealer in NJ hoping for the creation of a new regulatory agency that just might be hiring career beaucrats for life long employment.
Markowitz says that the growth of trade unions, old age pensions, unemployment insurance, and social protections are regulatory reforms. Really? what do they regulate? The programs that he names are in fact entitlement programs and serve no regulatory function.
Markowitz cover is blown when he tries to say that the reduction is social spending during the first few years of the Reagan Administration led to economic ruin. Let me see; the government reduces cost by reducing social spending and thus costs the taxpayers less for operating expenses. The government cuts taxes and thus gives taxpayers more of their own money to spend and do with as they please, which results in the economy collapsing. Interesting, with money concentrated in the hands of individuals instead of the government their purchasing power for goods and services should increase stimulating the economy,but according to Markowitz it leads to economic ruin.
My biggest bone to pick with Markowitz is the bizarre paragraph where he states the following: " Reagan revived Andrew Mellon's long discredited "trickle down theory of the 1920s and even used social-religious conservatism, in campaigns against abortion rights and for "family values," in much the same way that 1920s conservatives had used religious fundamentalism, prohibition, even attempts to bar women from wearing short skirts in public to divide people along urban-rural and ethnic religious lines while the economy stagnated and inequality grew spectactularly" I read this and went "WHAAAA?!!!?" What the hell does the abortion rights and social religious conservatism have to do with economic theory and planning. Perhaps it is these social reasons that Markowitz has a axe to grind with Reagan, but in terms of economic impact they are a practically non factors. I would like to know where and when Mellon's Trickle Down Economic theory was disproven because as far as I know it is still taught as a economic model. Saying something is disproven just doesn't make it so.
Blaming Reagan for the recession of the early 80's is a bit disingenuous. I guess Markowitz was gambling that his audience would not remember the Carter years and "STAGFLATION". The economy was in bad shape when Reagan entered the White house and steps had to be taken to get the economy moving. Now by Markowitz's own admission the U.S. did not come out of the Great Depression until WWII with its massive government spending on a military buildup- which is good because FDR did it. He says that the military build up of the eighties was bad- because he holds Reagan responsible for it. Too bad the build up started under Carter but Markowitz claims it started in 1982 to counteract the Recession. The build up started when the Soviets invaded Afghanistan. Don't let facts get in the way when you have an axe to grind.
If an industry is regulated its growth and expansion is limited. If it is deregulated it can grow or perish based on market conditions. A company that grows tends to hire more people and create oportunity. That is why sometimes derulation is good. Sometimes it is not. I realize the hour is long so I will wrap up with absurd statements that Markowitz makes that display he does not understand the subject he writes about. He states that entitlement programs saved the economy during the 87 crash :"Thanks to the "entitlements" (social security, minimum wages, unemployment insurance) Reagan condemned, the FDIC system and the Federal Reserve, he avoided the fate of Herbert Hoover."
Oh really explain how!!!!(entitlements are a liability not an asset), the market rebounded a couple of days later but saying that entitlement programs saved the day is like saying oranges and apples made the moon landing possible.
The reoccurring theme seems to be cut social spending and the private sector economy made up of self reliant people will collapse.
Markowitz comes off as a socialist calling for income limitations and government control of everything. I can think of nothing more repulsive than to be told my potential will be regulated by the government. I have stated before that Markowitz is a diletante when it comes to matters economic and financial but he proves it when he says " Finally, seriously considering public ownership of industries undermined by corporate corruption would serve as a powerful deterrent to those board room operators who will try to circumvent any system of regulation". A company that is privately owned and does not sell stock is private, a company that is publicly held sells stock. This is why the current scandals have largely impacted our economy, shareholders in these publicly held firms were left holding the bag. So Markowitz solution is more public ownership?!!? All of the companies currently wrapped in scandal have shareholders and were publicly owned companies. In closing I only ask that if you want to preach economic theory learn some principles and don't try to pass off diatribes as serious economic arguement.
Dave Tabaska - 8/2/2002
Is deregulation really the problem? The 1929 crash came after a period of hands-off government, but resulted in the Smoot-Hawley Tariff Act in 1930. The resulting trade war between the U.S. and its trading partners caused a world-wide depression that, in the U.S. at least, did not end until the outbreak of World War II. On the other hand, the 1987 crash did not produce any great government regulations or increases in taxation, despite many calls for Reagan to do so. The markets eventually regained their value, and then some in a short time. So, it would appear that government involvement in the economy (tariffs) had a negative effect, while a lack of involvement produced good results.
Another thing to point out is, why did it take 20 years for the intial attempts at deregulation to be felt? So far the companies that have been the subject of the scandals have been, with the exception of Enron, technology companies. Many did not exist 20 years ago, and the technology they make their money on only came about in the last decade or so. It seems, then, that the problem is restricted to businesses and businessmen that have little experience, and their downfall is the result of a tech company bubble that came into being in the 1990's, rather than a broad-based, nationwide business failure.
Dave Tabaska - 8/2/2002
Interesting posting - a subject on how to clean up Wall Street, followed by a paragraph consisting of no recommendations on how to clean up Wall Street.
Anyway, I'm always a bit curious about some peoples' obsession with W's minimal college grades. Apparently, one would believe that educational excellence = good President. However, if one were to follow that rule, then George Bush, who attained an MBA, is clearly a better Presidential choice than Al Gore, who didn't make it through divinity school. Carrying the subject a bit further, one would argue that Woodrow Wilson, the only PhD President, was a far superior President to Abraham Lincoln and his one year of formal education. However, I am hard-pressed to find anybody who does think that Wilson was better than Lincoln.
Rhonda Miller - 8/1/2002
An excellent historical summary of why the economy is in the current mess that the White House and Federal Reserve Board denies. The people on the street - i.e., poor people, the unemployed, those soon to be laid off, and anybody with a pension fund tied to Wall Street - have known for a long time that the recession still continues. Do we really expect a C-student who stole an election to put forth original ideas or develop an analysis of this mess? After all, his father used the term "Voodoo Economics" to describe Ronald Reagan's economic policies before he agreed to be Reagan's VP. It seems that what we're currently experiencing with George W is "Voodoo II Economics."
Arnold Offner - 8/1/2002
A good article, and on target, Except that deregulation really began before Reagan, alas, with Jimmy Carter (airlines, especially)....Where are Henry Wallace, Claude Pepper, and Hubert Humphrey, now that we really, really need.
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