The new mantra of the Republican Party is the old mantra –regulation is a “job killer.” It iscertainly possible to have regulations kill jobs, and when I was a financialregulator I was a leader in cutting away many dumb requirements. Wehave just experienced the epic ability of the anti-regulators to kill well overten million jobs. Why then is there nota single word from the new House leadership about investigations to determinehow the anti-regulators did their damage? Why is there no plan to investigate the fields in which inadequateregulation most endangers jobs? Whilewe’re at it, why not investigate the areas in which inadequate regulationallows firms to maim and kill. This columnaddresses only financial regulation.
Deregulation, desupervision, and de facto decriminalization (thethree “des”) created the criminogenic environment that drove the modern U.S.financial crises. The three “des” wereessential to create the epidemics of accounting control fraud thathyper-inflated the bubble that triggered the Great Recession. “Job killing” is a combination of two factors– increased job losses and decreased job creation. I’ll focus solely on private sector jobs –but the recession has also been devastating in terms of the loss of state andlocal governmental jobs.
From 1996-2000, for example, annual private sector gross jobincreases rose from roughly 14 million to 16 million while annual privatesector gross job losses increased from 12 to 13 million. The annual net job increases in those years,therefore, rose from two million to three million. Over that five year period, the net increasein private sector jobs was over 10 million. One common rule of thumb is that the economy needs to produce an annualnet increase of about 1.5 million jobs to employ new entrants to our workforce,so the growth rate in this era was large enough to make the unemployment andpoverty rates fall significantly.
The Great Recession (which officially began in the thirdquarter of 2007) shows why the anti-regulators are the premier job killers inAmerica. Annual private sector gross joblosses rose from roughly 12.5 to a peak of 16 million and gross private sector jobgains fell from approximately 13 to 10 million. As late as March 2010, afterthe official end of the Great Recession, the annualized net job loss in theprivate sector was approximately three million (that job loss has now turnedaround, but the increases are far too small). Again, we need net gains of roughly 1.5 million jobs to accommodate newworkers, so the total net job losses plus the loss of essential job growth waswell over 10 million during the Great Recession. These numbers, again, do not include the largejob losses of state and local government workers, the dramatic rise inunderemployment, the sharp rise in far longer-term unemployment, and thesalary/wage (and job satisfaction) losses that many workers had to take to finda new, typically inferior, job after they lost their job. It also ignores the rise in poverty,particularly the scandalous increase in children living in poverty.
The Great Recession was triggered by the collapse of thereal estate bubble epidemic of mortgage fraud by lenders that hyper-inflatedthat bubble. That epidemic could nothave happened without the appointment of anti-regulators to key leadershippositions. The epidemic of mortgagefraud was centered in loans that the lending industry (behind closed doors)referred to as “liar’s” loans – so any regulatory leader who was not ananti-regulatory ideologue would (as we did in 1990-1990 during the first waveof liar’s loans in California) have ordered banks not to make these pervasivelyfraudulent loans. One of the problemswas the existence of a “regulatory black hole” – most of the nonprime loanswere made by lenders not regulated by the federal government. That black hole, however, conceals two broaderfederal anti-regulatory problems. Thefederal regulators actively made the black hole more severe by preempting stateefforts to protect the public from predatory and fraudulent loans. Greenspan and Bernanke are particularlyculpable. In addition to joining the jihad state regulation, the Fed hadunique federal regulatory authority under HOEPA (enacted in 1994) to fill theblack hole and regulate any housing lender (authority that Bernanke finallyused, after liar’s loans had ended, in response to Congressional criticism). The Fed also had direct evidence of thefrauds and abuses in nonprime lending because Congress mandated that the Fedhold hearings on predatory lending.
The S&L debacle, the Enron era frauds, and the currentcrisis were all driven by accounting control fraud. The three “des” are critical factors increating the criminogenic environments that drive these epidemics of accountingcontrol fraud. The regulators are the“cops on the beat” when it comes to stopping accounting control fraud. If they are made ineffective by the three“des” then cheaters gain a competitive advantage over honest firms. This makes markets perverse and causesrecurrent crises.
From roughly 1999 to the present, three administrations havedisplayed hostility to vigorous regulation and have appointed regulatoryleaders largely on the basis of their opposition to vigorous regulation. When these administrations occasionallyblundered and appointed, or inherited, regulatory leaders that believed inregulating the administration attacked the regulators. In the financial regulatory sphere, recentexamples include Arthur Levitt and William Donaldson (SEC), Brooksley Born(CFTC), and Sheila Bair (FDIC). Similarly,the bankers used Congress to extort the Financial Accounting Standards Board(FASB) into trashing the accounting rules so that the banks no longer had torecognize their losses. The twinpurposes of that bit of successful thuggery were to evade the mandate of thePrompt Corrective Action (PCA) law and to allow banks to pretend that they weresolvent and profitable so that they could continue to pay enormous bonuses totheir senior officials based on the fictional “income” and “net worth” producedby the scam accounting. (Not recognizingone’s losses increases dollar-for-dollar reported, but fictional, net worth andgross income.) When members of Congress(mostly Democrats) sought to intimidate us into not taking enforcement actionsagainst the fraudulent S&Ls we blew the whistle. Congress investigated Speaker Wright and the“Keating Five” in response. I testifiedin both investigations. Why is the new Houseleadership announcing its intent to give a free pass to the accounting controlfrauds, their political patrons, and the anti-regulators that created thecriminogenic environment that hyper-inflated the financial bubble thattriggered the Great Recession and caused such a loss of integrity? The anti-regulators subverted the rule of lawand allowed elite frauds to loot with impunity. Why isn’t the new House leadership investigating that disgrace as one oftheir top priorities? Why is the new Houseleadership so eager to repeat the job killing mistakes of taking the regulatorycops off their beat?
Bill Black is an Associate Professor of Economics and Law atthe University of Missouri-Kansas City. He is also a white-collar criminologist, a former senior financialregulator, a serial whistleblower, and the author of The Best Way to Rob a Bank is to Own One.