One Lesson from the 1930s: Financial Regulation Has to Be Bold

[This article also appears on Huffingtonpost.com. You can access it from my author page here.]

Three weeks ago I asked why so many Republicans seem to hate America. Well, today, one reason has become clear: Because some of them love banks and big corporations more than they love the American people or the American economy.

President Obama revealed his plans to regulate the financial industry today, and I thought House Minority Leader John Boehner's response was telling. He said: "I think it's just going to be too big of a foot on an industry that already is having financial problems."

I completely understand that differing views and philosophies on government is actually a positive thing, and I certainly don't think the Democrats have a monopoly on good ideas. But the Republicans have abdicated their position as a contributor to the national conversation, having become a negative force on political discourse in that they no longer even pretend to advance ideas that are good for the country. Instead, they use deception, fear and intimidation to try and trick and scare people into supporting policies that will benefit the party's narrow constituency, including corporations and financial institutions.

Boehner's quote shows that he isn't even trying to pretend. He is there to protect the banks. Last year, the financial system nearly came crashing down, in large part because the regulatory system set up after the Great Depression had been systematically dismantled in the previous 28 years. As much as the financial industry likes to advance the myth that last year's financial crisis was a once-in-a-lifetime, who-could-have-seen-it-coming event, most economists agree that the crash was the result of human error, with finance professionals taking too many chances thanks to a compensation system that rewarded deals regardless of future consequences. (The New York Times reviewed two books yesterday, Daniel Gross's "Dumb Money" and Gillian Tett's "Fools Gold," which demonstrate this idea from different perspectives.)

Certainly, the destruction of the post-Depression regulatory structure created an environment that allowed the events of last year to come to a head (especially the 1999 Gramm-Leach-Bliley Act, which repealed the provision of the Glass-Steagall Act of 1933 that essentially prevented banks from taking on so much risk by separating commercial banks and investment banks).

After the financial system nearly collapsed and slipped into crisis, and after the banks needed billions of dollars in bailouts, Boehner has the nerve to tell the American people that he is worried about too much regulation? Not to mention his line about "an industry that already is having financial problems." How the hell does he think the financial sector got into its current mess? It was self-inflicted, and largely a result of a lack of regulation. Seriously, Boehner's argument seems to be that due to a lack of regulation, the banks made horrendous decisions that put them in bad financial shape, so to help them, we should not regulate them. This is the current state of Republican thinking: circular logic that makes no sense.

A lot of writers draw parallels between how both Franklin Roosevelt and Barack Obama won the presidency and had to deal with a financial crisis left to them by historically bad Republican incumbents (Paul Krugman used 1930s examples in his latest column to make his argument that the Obama administration has to continue its current economic policies and not worry about inflation). While I'm sure from a policy standpoint, a lot can be learned from what Roosevelt did and didn't do, the situations are not identical, so I understand that everything that worked (and didn't work) then may not have the same results now.

But one thing that can be learned and applied directly from the 1930s is the politics behind the crisis. The stock market crashed in 1929, but Hoover took no effective action to stop the ensuing economic and financial collapses. Roosevelt was sworn in in March 1933, and by the end of the year, both the Glass-Steagall Act of 1933 and the Securities Act of 1933 were passed to address the crash and the depression. The Securities Exchange Act of 1934 followed, and, along with the Investment Company Act of 1940 and the Investment Advisers Act of 1940, the laws created a regulatory framework that successfully held off abuses and boom-and-bust financial cycles until the savings and loan crisis popped up in the 1980s (after deregulation had begun).

I'm sure the Boehner equivalent of the mid-1930s was aghast at the new regulations, but that didn't stop the bold legislation from being passed and signed in a matter of months. There was a crisis, and everyone knew where it had come from, so solutions were proposed and enacted to try to ensure that a similar crash could not occur in the future.

We find ourselves in a similar situation in 2009, but the reaction isn't quite the same. We know that the dismantling of the regulatory infrastructure enabled last year's financial crisis, and yet from listening to the Republicans, it's almost like it never happened. Now, the president releases proposed regulations that are heavily watered down when compared to what was adopted in 1933 and 1934, and what many were proposing for 2009, and even the compromise proposal is batted away by Boehner.

President Obama even admitted that his proposal is not as strong as he would like. A New York Times article today describes the the plan as "the product of weeks of meetings among government officials, financial experts, lawmakers, industry executives and lobbyists, many of whom were invited to help the White House draft the proposal." And the president is quoted as saying: "We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don’t want to tilt at windmills." The article notes that on certain issues, mutual funds, hedge funds and dealers in derivatives were able to score partial or total victories.

Normally I am a strong supporter of politicians who deal in the real world, and I know that Obama is correct that if his plan doesn't pass muster with members of Congress, nothing will get done. So I realize that the blame lies more at the foot of Congress (especially centrist Democrats afraid of being branded as over-regulating liberals) than with the president. But putting blame aside, I am frustrated that the response to the crisis seems to indicate that we have forgotten the lessons of the 1930s. Everyone in Washington should be bolder, taking the same kind of decisive action that their predecessors did during the Great Depression. After all, the regulatory framework they constructed did an outstanding job, holding off crises until after it was torn down.

That is why I am so dismissive of Boehner's logic-challenged, ideology-driven, useless comment on regulation. And why I hope he is absolutely ignored. If the new plan is too tepid and doesn't impose real changes to the regulatory system, we will still be vulnerable to another financial collapse fueled by greed, and we will be faced with more bailouts of too-big-to-fail institutions.

It's time for everyone in Washington -- Democrats and Republicans -- to look at the example of the quick action on legislation in 1933 and move on a real regulatory overhaul in the coming months. Nobody should be handing the banks that caused last year's meltdown what they want. Contrary to what Boehner says, a big foot needs to be placed on the financial industry, to make sure that last year's near collapse can never happen again.