Reform of Financial Regulation May Be Global but the Past Offers Solace

As we speak of the complete overhaul of financial and securities regulation in the USA and even globally, and as many call for a first 100 days of a new President in 2009 analogous to the 100 days of President Franklin D. Roosevelt that produced the Securities Act, I find comfort in the words of former SEC Chair and US Supreme Court Justice William O. Douglas. That comfort is that we have been there before and came out of the crisis post-reform with even stronger financial markets. As President Roosevelt himself said, this great nation will endure as it has endured. I find comfort in the President’s remarks also.

In a speech at the University of Chicago in 1936, then SEC Commissioner Douglas said that, while this is called a financial crisis, it is nothing more than the pent-up forces of abuse, mismanagement, and mal-distribution of economic effort and income which breaks out in rhythmic fashion and towards which predatory high finance makes a major contribution. As Justice Holmes said, the most difficult task is to teach the obvious. According to Commissioner Douglas, the obvious condition for reform is that these predatory interests were on both sides of the transactions. If investment bankers did not have control over the enterprise, he reasoned, they would have been able to load the enterprise ``with the cats and dogs'' which they as investment bankers had acquired.

Of the many forces which breed insecurity, said Douglas, the exploitation and dissipation of capital at the hands of predatory high finance is one. And let us not forget that the loss of equity in the 1930s was comparatively just as staggering as the recent loss of equity in our present capital markets. The former Justice relates that from 1929 to 1932 security values on organized exchanges dropped over one hundred billion dollars, which was equal to the total income of the federal government from 1789 to June 1936.

The Justice goes on to tick off the elements of predatory high finance. In the first place, it is nothing but a game played with other peoples’ money. In the second place, it is interested in an immediate profit. Complex financial instruments are created with little connection to underlying value

The backbone of wealth of all or our financial institutions, said the Justice, are our securities, and in back of those securities are railroads, factories, and productive labor. When this basic precept is ignored, the result is insecurity and instability in those values that, on a broad scale, affect the whole national life; and now globally.

The financial markets are much more global than they were in 1936 when the Justice spoke. Thus, we may see, not only national regulatory reform, but multilateral financial regulation. I believe that President Sarkozy of France has called for multinational regulatory reform.