What It Will Take to Fix Our Economy
It started on Monday evening, when I read an Associated Press story online about how the Bush administration ignored the developing problems in the financial markets. The story described how way back in 2005 bank regulators proposed a series of guidelines that would have gone a long way toward stemming the current crisis and preventing the worst-case scenario from occurring. The strongest, most relevant of those proposed guidelines never made it through to legislation, though, as they were dropped after pressure was applied from key industry leaders.
On Tuesday morning it continued when I read the BankInfoSecurity.com article discussing the Top Ten Regulatory Issues of 2009. The first item on the list discussed the future of the various regulatory agencies that oversee banks and credit unions. Although it wasn't explicitly mentioned in the article, the gist of the item was that overhaul is needed. While I agree, I also am reluctant to do so without clearly explaining that I think it's necessary to reduce redundancy and limit the work required to achieve and maintain compliance. I don't think it's necessary because the system failed us. This train wreck of an economy didn't happen because the OTS, OCC and FDIC didn't play nice together or do their jobs; it happened because the proper controls weren't in place to empower them to do what was needed. And then I think back to the AP story from the previous night. What if they were granted the authority to oversee lending? What if they were granted these powers in 2005?
This train wreck of an economy didn't happen because the OTS, OCC and FDIC didn't play nice together or do their jobs.
The 24-hour period concluded with me having made the mistake of picking up this week's issue of Newsweek. It was sitting right there on the coffee table, next to my most recent issue of Sports Illustrated, and for whatever reason I had a mental hiccup and chose somber and introspective over entertaining and amusing. I read three pieces before feeling my hands go numb and my blood turning cold and decided to put the magazine down and back away slowly. The cover story was entitled "How to Fix the World"; very serious and a bit scary, the article focused on terrorism in general and Mumbai in particular. I decided to skip ahead a bit, and the next article that caught my eye was about what President-elect Obama needs to focus on during his initial time in office. Let's see, does he want to be closer to the rock or the hard place? Economy first, healthcare second? Or healthcare first, economy second? But while thoroughly depressed at that point, I took one more shot at finding something less troubling to read and flipped back a few pages to an article discussing Robert Rubin (former Treasury Secretary under Bill Clinton and current high-ranking official at Citigroup). The story explored Mr. Rubin's general financial strategies from his time at Goldman Sachs through to his current position. But what I found to be the most interesting aspect of the article was the line where it suggests that he helped create the current economic crisis. That's when the magazine closed, and I went back to doing what I normally do at night, catching up on work-related activities.
Here's my problem with all of this in totality: We the people of the United States of America are likely going to spend considerable time investigating how we allowed this economic situation to develop, rather than focusing on how we can fix it and prevent it from happening again. We're going to look for the guilty parties, make them explain why they did what they did, figure out how to punish them and hope that somehow it will make us all feel better. Ineffective regulatory oversight might have played a role, President Bush's administration didn't assume a larger role as an advocate of the constituents (email me separately on this point, I have endless theories) and key players such as Robert Rubin (and a long list of Wall Street and banking executives) potentially helped get the snowball rolling down hill. But what really helped make this mountain out of what was closer to a mole hill just a couple of years ago was that nothing was done to stop it because there were no mechanisms available to do so. No one had the authority or means by which to stop the snowball as it gained steam, grew wildly in size and started crushing everything in its path.
To quote a favorite line from a Stephen King novel; "Done bun can't be undone." We need to figure out a few things in the very short term -- how to stop market conditions from worsening, how to steady the economy, and most importantly how to put in place the safeguards to make sure we're not allowed to do this again. Make the argument that the government should avoid oversight in a free-market economy if you want to, but it's easy enough to counter by pointing out that the government now owns a significant portion of that free-market, only it wasn't cheap, let alone free. If my tax dollars are going toward an ownership stake in all of these institutions, then I as a shareholder (how does that work exactly?) demand that management cooperate fully and work with regulators to figure out what to do and how to do it.
I always offer the caveat that I'm predisposed toward being supportive of regulations because it's my line of work. However, I offer this today as a taxpayer, not a practitioner. If I can convince our clients that they need to worry about updating their Business Continuity Plans or conducting a periodic review of their vendors, I'd like to think it's even easier to convince them that they need to prove they're making sound business decisions as well.