Published on -9/26/2012, 10:05 AM
It is difficult to hear calls for less regulation and oversight, a smaller government and the allowance of a free market to correct itself -- and not wonder what economy these people have been studying. It simply can't be the U.S. system.
Just to be clear, we believe small businesses are the backbone of the economy. We believe market forces are extremely useful up to a point. And overly burdensome regulations do not accomplish a thing except preserve that bureaucracy's budget.
But we also recall what led to the deepest recession since the Great Depression. It wasn't an overbearing government. Quite the opposite. There were factors present in the U.S. financial crisis that could have been controlled or even avoided had there been strong enough regulations in place.
The blame for this country's perfect storm lays at many a corporation's doorstep. Overall, it was the pursuit of short-term profit with no regard for consequences by a multitude of players at the same time. Greed and criminal activity were at work simultaneously, exacerbated by fear and uncertainty.
It was the private sector that presented our economy with sub-prime mortgages, insufficient capital holdings, adjustable rate loans and the housing bubble. Investors traded bundles of credit default swaps, collateral debt obligations and mortgage-backed securities that were tied to the borrower's ability to pay off loans. Companies stopped lending to each other, forcing many businesses to fail without access to cash. Layoffs led to decreased consumer spending; foreclosures began mounting.
The crisis hit Lehman Brothers and AIG particularly hard, which led to President George W. Bush's massive bailout. The dominoes kept falling as Barack Obama took office. In addition to a second bailout, this time for the auto industry, the new president encouraged Congress to pass the Dodd-Frank Act. This overhaul of financial oversight was intended to prevent future collapses and reduce the influence of too-big-to-fail institutions.
Critics of the regulations large banks are subjected to are many. It hasn't, however, stemmed their growth. Prior to the financial crisis the five largest banks -- JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs -- had collective assets equivalent to 43 percent of the U.S. economy. In 2011, the collective $8.5 trillion in assets equaled 56 percent of the economy. These five banks were the recipients of trillions of dollars in loans from the Federal Reserve, making them twice as big as they were before the crash.
Their pursuit of exotic derivative investments has continued unabated. The five banks' exposure in this brewing bubble market exceeds hundreds of trillions of dollars. There isn't enough money in the world to cover the potential losses if there is a derivatives burst. We would guess their investments in politicians of all parties would pay off in a bailout that would be without precedent.
The too-big-to-fail companies aren't the only ones playing games. A quick perusal of headlines from just the past two weeks, which is by no means all-inclusive, suggests:
* Congress is looking at Microsoft, Hewlett-Packard and other multinational corporations' regular practice of moving profits to offshore locations while using the same money to run U.S. operations. Some 1,000 companies have been identified that shifted $1.5 trillion offshore, legally allowing them to avoid billions in taxes every year.
* The founder of Peregrine Financial Group in Iowa admitted he embezzled $200 million from the company, forcing it into bankruptcy. Some 17,000 customers will be fortunate to get back 30 percent of the assets they owned.
* More fallout from history's largest Ponzi scheme has one of Bernard Madoff's former controllers pleading guilty to conspiracy. Madoff was convicted of stealing billions in a fraud that took place over four decades.
* Both Apple and Samsung use manufacturers in China that are being investigated for using illegal child labor and forcing unpaid overtime. China's minimum wage laws provide workers with $171 -- per month.
* The IRS paid out the largest government whistleblower award, $104 million, to a banker who's already served time for helping a client hide money in a Swiss bank. The case was part of the UBS AG tax-evasion scandal that resulted in the bank being fined $780 million.
* The National Retail Federation is opposing a proposed $7.25 billion settlement that Visa Inc., MasterCard Inc. and major banks have agreed to pay retailers for alleged price fixing on swipe fees.
* Discover Bank will pay a $14 million fine and refund $200 million to customers for enrolling them in payment-protection and credit-monitoring programs without their authorization.
* Tyco International Ltd. will pay nearly $27 million to settle U.S. charges that it bribed officials at government-owned companies in more than a dozen countries.
Not every private company is evil by nature. Not by a long shot. The majority of U.S. businesses find ways to conduct themselves ethically, provide goods and services needed in the market, and don't seek shortcuts in their pursuit of profit.
But there simply are too many examples of malfeasance in the marketplace to possibly consider reducing regulations and penalties. Unfettered capitalism hasn't existed ever since we discovered ways to privatize profits and socialize losses.
American consumers desperately need more protection -- not less. Without it, we risk the collapse of not just the economy but the entire country.
Editorial by Patrick Lowry