- We Can Jump Start Sustainable US Job Creation and Dramatically Improve The Economic Forecast With Simple Actions To Rapidly Restore Offshored Manufacturing Jobs Back Home
- This post has three main sections and two subsections: 1. Introduction and Roadmap; 2. How Government Can Help Manufacturers To Return; 2a. The Carrot; 2b. The Stick; 3. Manufacturing Jobs Are Different because Of Asymmetrical Treatment By Economists, Past Administrations, and Congress
- 1.Introduction and Roadmap
- 1. President issues a Declaration of National Commitment to bring back 4 million offshored manufacturing jobs within 24 months. That is sufficient to supply most of the national market for manufactured goods.
- 2. President Announces a new United States Job Creation Agency (JCA) and appoints a Job Creation Agency Director (JCAD), possibly within The White House, with authority to act quickly.
- 3. JCAD reallocates 2% of existing budgets from all relevant cabinet level federal agencies.
- 4. JCAD staffs the Agency with people selected from existing federal agencies.
- 5. President and JCAD speak with US State Officials and JCA begins planning activity, coordinating with regional state and local officials and agencies, as needed.
- 6. JCAD establishes database organized by Regions, States, Cities and Towns to assist manufacturers locate suitable facilities. It identifies the status and renovations and new construction required. The JCA Database identifies infrastructure renovations and upgrades required.
- 7. JCAD coordinates with Fed and Treasury and creates loan guarantees and bond guarantees. Makes it easier for regional, state and local agencies to defer taxes for time required to pay back loans and or bonds.
- 8. JCA assists manufacturers, local governmental agencies, unions, chambers of commerce, and banks, in all matters related to facilitating the transfer, as requested.
- Jobs We Expect To Create In The Current Weak Economy
- Quite a few. In an article appearing Wednesday, September 8, 2010, in The Washington Post,
Light bulb factory closes; End of era for U.S. means more jobs overseas, Peter Whoriskey says "...the number of manufacturing jobs in the United States has been shrinking for decades, from 19.5 million in 1979 to 11.6 million this year, a decline of 40 percent." That means 7.9 manufacturing jobs were offshored. Sixty percent of those, more than 4.5 million jobs,that supply the domestic market, could be recovered.
- Quite a few. In an article appearing Wednesday, September 8, 2010, in The Washington Post,
How Long Would it Take?
- No Additional Funding Would Be Needed
- What is needed is to set a new top priority jobs creating agenda by The President. People from a variety of Federal and State Agencies would be reassigned to support an effective manager, who could be appointed by executive order by The President. Sign on by Congress leaders of both parties would be valuable, but not absolutely required.
- Planning and canvassing activities would focus on assisting manufacturers who want to to relocate their manufacturing plants back to the US to do so. A good first step for the new manager would be to take the necessary steps to set up a national facilities database organized by regions, states and communities where facilities exist or could be renovated to suit.
- Since a grass roots canvassing activity using experienced local people in all neighborhoods would be desirable, census workers may be rehired and used again. That would take funds, but much of it could come from existing Federal department budgets as lower priority activities are put on hold and people reassigned to support jobs creation. This would be possible as soon as the President activates a new, top priority, rapid jobs creation, focus. Coordinating with regions, states, cities, towns, and local communities would be the first task.
2. How Government Can Help2a. The Carrot
- We know from bitter experience that manufacturing plants including all their manufacturing lines, ancillary measuring, monitoring, and control equipment, sensors, etc., can be exported, in a matter of a few brief months after a suitable facility has been obtained or built via purchases, leases, or construction.
- Importing jobs can be equally fast. Importing the offshored manufacturing facilities to the US can be completed rather quickly once a suitable vacant facility can be located, and renovated to meet a given manufacturer’s needs. Existing space will be snapped up quickly, and new plants will start to be built to suit when it becomes clear one does not want to be the hindmost once "onshoring" is in vogue.
- If the current approach of this and recent administrations continues, Peter Whorisky's article, makes it clear that very few of the one million manufacturing jobs in green industries that, according to President Obama, will be created, will remain in this country. So, I will now assume there is a sudden realization by The President, and all his advisors who matter that a change in approach is needed. I will assume further that there is a brand new national commitment to what looks like a war time footing for exported job recovery. The precedent is how we shifted gears after Pearl Harbor. We shifted industries and created jobs, lots and lots of jobs very quickly. The first thing that will happen is that planning activities will generate jobs almost immediately, as the agencies, regions, states, communities, and companies seek skilled planners. We will assume the number of those jobs is the same as the previously deployed census workers, 100 thousand jobs. The canvassing of available empty facilities and the needed renovation will no doubt be aided by owners coming forward to ensure their property is included in a new facility database. A significant number of civilian sector jobs will be generated quickly when it becomes clear the administration will use existing federal agencies, departments, and a significant fraction of their existing and future budgets to facilitate rapid planning for bringing back the exported facilities and jobs. Sort of like it did shortly after Pearl Harbor.
- Not long after that, existing vacant facilities will start to be refurbished, modified, renovated and new construction will be required not only for buildings but also for rail lines, highway interchanges, and long neglected bridge and road maintenance. The buildup of large numbers of construction jobs will be rapid. Let us assume for starters this refurbishing activity in the construction industry will require a number of new jobs equal to 20 percent of the lost jobs. That would be approximately 1.6 million jobs. Since only 60% is for current domestic needs, we will use one half of that number or 800 thousand jobs.
- I guestimate a time period of three months for significant planning and canvassing job creation of roughly two hundred thousand jobs to kick in. Those will be in industrial and city planning. With a further 400 thousand jobs in the maintenance and construction industries. As it builds up steadily, that could easily grow in 2011 and 2012 to replace a significant fraction of the lost house construction job market. Home Depot may consider recreating its contractor division ;)) Support industries will be energized into, slowly at first, hiring as well...
- Depending on their facility needs and flexibility, some manufacturers' domestic manufacturing jobs will be created within three to six months. The start will be slow as people do their planning. Then, within six months, as planning winds down, there will be a rapid increase manufacturing job creation. At that point, competition for space and skilled manufacturing workers will kick in. Training schools and community colleges and universities will be hiring too.
- This job creation approach benefits main street, hospital boulevard, academic way, and labor neighborhood. It seems likely the plan would be supported by most groups, including business, labor, academics, government, legal and accounting professionals. Religious groups will find it ennobling. There is no significant obvious downside for either major political party or independents. Libertarians could go either way. The only potential and very serious obstacle is the current crop of economists who have the President's ear. They may not find this approach easy to live with. However if they adopt the WW II mindset, they should be able to adjust without changing their peacetime paradigm.
The Government can assist in a number of ways
- Incentives: The Government's Role
- The Federal Government can provide direct financial assistance through grants, loans, or by guaranteeing local or regional bonds to communities, states or regional entities to assist companies to move manufacturing facilities, and hence manufacturing jobs, from abroad to the US.
- One approach would be to provide Federal guarantees for governmental entity bonds to be used for facilitating planning and the actual return of manufacturing facilities. This would lead to an almost immediate employment of workers needed to staff the modern facilities.
- We know from bitter experience that manufacturing plants including all their manufacturing lines, ancillary measuring, monitoring, and control equipment, sensors, etc., can be exported, and hence imported, in a matter of a few brief months after a suitable facility can be obtained or built via purchases or leases. This means that returning manufacturing facilities to the US can be completed rather quickly once a suitable vacant facility can be located, and renovated to meet a given manufacturer’s needs. Plants will start to be built to suit when it becomes clear one does not want to be the hindmost once Onshoring is in vogue.
- In addition, the Federal Government can provide other types of assistance, to communities, states, and regional groupings. For example, various governmental agencies can coordinate and facilitate needed planning activities, These planning activities, in and of themselves, will generate a significant number of jobs. So will the renovation of the existing plants, new plants, and conversion of other types of facilities such as redundant strip malls. The number of such building trades generated can be estimated from the size of the needed renovated or new facility, This also correlates directly with the number of manufacturing jobs that will be returned. Other Federal assistance, legal and financial means can be used such as preventing foreign imports from undercutting and stifling the new Onshore manufacturing plants. Tax policy can help enormously via incentives and penalties. More on this in The Stick section
- The following paragraphs address some planning and implementing activities that might benefit from Federal incentives
- Zero percent Federal corporate tax on income from facilities moved back from off-shore for a number of years is a real possibility.
- We need to prevent a corporation from just opening an office, and receive tax free money from goods manufactured offshore. One approach is to use a sliding scale proportional to the fraction of their manufacturing jobs that they do bring to the U.S. That's a really big carrot that might require a minimum of government activity.
Important Planning Activities
- Help communities offer zero or reduced tax plans to corporations for some period of time. That could be the time it takes for manufacturers to recover the cost of moving their plants back to various locations across the US.
- To prevent gaming the system, there should be a cut off date on when jobs were moved out of the U.S
2b. How Government Can Help - The StickPossible Penalties For Companies That Practiced Offshoring And Do Not Return
- US Regions, States, Counties, Cities, Towns, etc should be encouraged to work together and with former and new manufacturers to plan for effective and efficient movement of plants in a rational fashion. Governmental participation that would assist manufacturers can be very helpful. Otherwise every plant will have to reinvent the wheel with fewer economies of scale. A significant advantage of the planning activities is they provide an early job stimulus to jobs that do lead to real economic growth, and are therefore more than sustainable. they act more as catalysts in addition to boosting short term well paying jobs of people with education and experience. The jobs they help create will be employing blue collar jobs that are currently sorely lacking. Offshoring left a huge hole in employment opportunities for people who could never do higher technical skilled jobs or planning jobs, regardless of retraining programs.
- The return of manufacturing will quickly lead to cash flow in many communities. This will support amplifying and stimulating service industries and lead to hiring. Just think lunch counters that workers like. Repair people will be in demand. Retail stores will boom.
- Planning activities should include identifying suitable inventories of existing vacant enclosed spaces and the types of weight bearing floors loading facilities, and office space exist. With the current state of demoralization on Main Street, this may take some time. The Regions, States, Counties, Cities, and Towns, should be required to create such inventories if they wish to receive Federal Manufacturing Assistance for Jobs In Communities (MAGIC) Recovery funds.
- The purpose here is to reverse the policy of not taxing company profits on manufacturing facilities we encouraged to move Offshore in the first place.
- We might address how to best recover some fraction of the lost tax income due to Federal encouraging of Offshore job movement as national policy by both parties. In future imported goods. Of course, the advantages of moving a plant to the us will be amplified by the disparity in the taxing of foreign to domestic profits. If a company decides to leave the US, it will now be at a significant disadvantage taxwise. This should encourage the return of many manufacturing jobs that were pushed out by Federal tax policy over the last 40 years or so.
- Foreign auto manufacturers have been moving new plants to the US. US manufacturers are returning some manufacturing here due to the significant disadvantages they have discovered in using foreign workers and manufacturers as their supply sources.
- Some preference might be given to returning certain types of manufacturing plants and facilities to the same regions from which we actively encouraged that they move offshore.
- To be consistent with Paul Krugman’s seminal work, “Increasing Returns and Economic Geography”(1) thought should be given to grouping returning industries in cohesive masses to attract trained and trainable workers, the efficient local mobility of workers, or for the manufacturers to effectively use an existing labor pool.
- On September 12th, Paul Krugman advocated in his NY Times op ed piece China, Japan, America, imposing tariffs on Chinese goods. That is more than I had hoped for. Way to go Paul!! But who will go along with that? The opposition is too strong and the thought of tariffs is scary to most folks who do not know better, as the Chinese do. Tariffs are one tool. Just the threat of them would motivate some manufacturers to return their jobs here. Let's look at some additional useful approaches.
- Federal, State, and Local Governments shall purchase only from companies that manufacture n% of the assembled item and m% of each of its subassemblies in the US.
- Said governmental entities or their agents shall reduce the price they may pay for any imported item. Said reduction shall be equal to the difference in wage costs between the cost of wages plus benefits paid by the manufacturer in the country of manufacture and the equivalent cost of such wages plus benefits of a similar item manufactured in the US.
- Said government entities or their agents shall further reduce the price they pay by the amount of tax that was not paid in the US. The calculation shall include income taxes not paid on the wages that would have been earned in the US.
- The calculation could be performed by the Congressional Budget office or under contract by a US modeling entity such as a US defense contractor, or a US econometric modeling contractor.
- If no such item is manufactured in the US, we could either forbid its import, or we could use a modeled price. Modeling should be done by a suitable manufacturing modeling entity such as a US defense contractor, or a US econometric modeling contractor. These calculations will create additional useful jobs in the US.
- People who pushed for offshoring said the support jobs were about a half a worker per manufacturing job. That is totally nuts.
- That enormous loss has translated to a gradual rise in the economist’s definition of their acceptable level of core unemployment. Decades ago that level was three percent. Then it was four percent. Then five percent. Now they want to revalue it to six percent. Since no one believes that anymore, they are not talking about it so much. But think about it. The increase of persistent, or residual, or core unemployment is almost all due to the forcing “offshore” of the US manufacturing sector. In fact the percentage of unemployed or under employed people is staggering. it is between 18 and 25 percent depending on who is doing the estimate. Yes indeed, the true multiplier of support jobs to the very manufacturing jobs our government pushed out, at the economists urging, is a killer! More about that multiplier later in this blog entry.
- 3. Manufacturing Jobs Are Different Because Of Asymmetric Treatment By Economists, Past Administrations, And CongressJob Asymmetry Makes It Very important To Focus On Bringing Back Offshored Manufacturing Jobs.
- A recent article asserts that manufacturing jobs are no more important than any other job category. In a later blog entry, I will address the reasons manufacturing jobs are so important. Simply stated, if you have an increase in restaurants, that does not necessarily lead to an increase in local manufacturing jobs. However if you build a local manufacturing plant, there is a definite number of additional sustainable jobs that will be generated locally. That additional activity is not present as long as the US government continues to force manufacturers overseas. And that makes all the difference in the ability to maintain and build infrastructure, to support new houses, etc. It is an asymmetrical situation regarding manufacturing jobs versus service jobs. And that is because fresh water economists and the government administrations who have believed their dogmas have made it asymmetrical. If we break that link, the jobs would no longer be asymmetrical.
Tuesday, September 14, 2010
Thursday, April 29, 2010
As you know, I read Yves Smith's excellent blog Naked Capitalism whenever I can. Here is my comment:
It was exciting to see you on PBS News Hour last night. Everyone with me saw your depth and breadth of knowledge. By the way, I had been reading the copy of ECONNED that I purchased earlier in the day at the Starbucks in my local Tucson Barnes & Noble. Thank you for writing it!!
I think it is likely that a bill will pass because the Republicans cannot be seen as being pro Wall Street thieves. It will happen quickly because the Democrats have been burned and educated by the Republican delay and vilify tactics on healthcare reform.
As a practical matter, the best that can be hoped for is that knowledgeable people such as Yves Smith, Brooksley Born, Elizabeth Warren, and perhaps certain States Attorneys General, draft and submit amendments to ensure implementation of effective oversight, regulation, and controls. Amendments to the bill should include administrative oversight guidelines for the relevant agencies.
The difficulty you raised of controlling international corporations is not insurmountable. Foreign governments will likely not comply with US requirements. However that is not a show stopper. An amendment can stipulate that what the bank does in its foreign operations must be in conformity with this bill, and must be transparent. Required reports on the activities of foreign branches or divisions to US agencies in the bill and the amendments should be no less frequent than quarterly. Potential penalties of losing their license for US operations is a big stick. Penalties involving the raising of reserve requirements in the US depending on foreign risk, as assessed by our oversight committees, is another big stick.
All off the books entities should be forbidden and called out as a prima facia proof of fraud and of the intent to defraud. Their mere existence should carry penalties that do not depend on proving any resulting fraud actually took place.
A sine qua non amendment repealing Senator Phil Gramm's infamous Repeal of the Glass-Seagall Act of 1933 should be inserted at the last minute.
As you said, exhaustive forensics would be very valuable and should continue long after a bill is passed. An amendment stating the intent of the bill that administrative agencies shall update their procedures and penalties as a result of ongoing Forensic investigation. It should provide a certain sum to fund this work for ten years, and should mandate which agencies must continue a level of forensic effort .
I agree with you that the use of CDOs should be limited. Their real value is in situations where the risk is stochastic, and not deterministic. In the case of adjustable rate, no documentation, subprime mortgages, involving the lack of documentation requirement, the use of ARMs, and the fact that these mortgagors were the last possible buyers at the extant prices, lead to an obvious, totally deterministic, easily modeled mechanism for any such mortgage failing to perform in 39 months of issue. Also, credit default swaps with entities holding similar mortgages in different regions were completely and predictably useless since all regions were using the same faulty application and review methods.
I should add that the tools developed and implemented to assess risk deal only with the stochastic parts of risk, and leave out totally the non-stochastic parts. An example of that can be seen in my assessment quite a while ago of the risk of the share value of Citigroup declining below the $40 price when I did my totally deterministic evaluations. Simply stated, given readily available data, it was easy to see that the model being used by banks and insurers was completely wrong.
Monday, April 26, 2010
President Reagan's administration did four main things that have had lasting economic effects that qualify as major causes of the current crisis. They are fundamental or root causes, not the immediate or proximate causes. We shall see that sometimes they merge.
What are those relevant and significant things the Reagan administration did?
1. It cut taxes.
2. It raised defense spending dramatically, leading to
(a.) a rapid rise in employment,
(b) a rise in the national debt, and,
(c) the intended collapse of the Soviet Union which realized it could not keep up with the Reagan defense spending levels.
3. Treasury Secretary "Tall Paul" Volker raised interest rates dramatically to reduce price increases inherited from the Carter administration. This added to the cost of doing business, which was offset by 1. and 2. above, i.e., the dramatic increase in Reagan's government spending and reduction in taxes, that also lead to a significant increase in the national debt.. That made it harder to deal with a future crisis, should it occur.
4. The Reagan administration accepted the views of the "freshwater economists" (Chicago School of Economics) that manufacturing jobs should be exported to countries with the lowest labor rates in the name of "efficiency." Where efficiency is unbelievably narrowly defined. Freshwater economists also believed in no taxation, so the companies that exported jobs picked up two quick and major advantages over those that still manufactured goods in this country:
(a) They paid no US taxes, and,
(b) they paid the world's lowest feasible labor rates.
Needless to say such corporations and the countries to which the transferred their manufacturing operations may have funded that school and hired it's professors as advisors! When I first heard the Chicago School's mantra that we should export manufacturing jobs, and I actually knew people who did export their own company's jobs to China, I said to myself. This will eliminate a major portion of jobs in the US and will ultimately and unavoidably lead to a very large US unemployment rate, possibly a collapse, and a decline in the power of the nation. It was obvious to me that there was no mechanism whereby jobs would be magically created as needed, I often say, by the tooth fairy, to pick up the slack. They said it would happen as needed. it was an article of faith, a religious dogma. I said they were mentally challenged. The disaster that would ultimately and inevitably follow was obvious.
It is very important to note that increasing government spending, as was done by Reagan, nowadays has less of a positive effect on US employment figures since so many goods purchased will be manufactured elsewhere. That needs to be change. That change is crucial.
The Clinton Administration pushed hard to implement actualize, and instantiate, the freshwater economist dogma. They said exporting manufacturing would increase US jobs and reduce unemployment. I said show me the mechanism. They said displaced US workers could be "retrained' to higher skill levels. I said to do what? When Vice President Al Gore came to MITRE and recommended that Barry Horowitz get rid of his "grey beards," my good friend and colleague Joe Cynamon said what do they want to retrain us to do? It was a funny line, since they never identified the new, and vastly superior skill set.
And what of the 50% of the people whose abilities are well suited to manufacturing work, and perhaps are not ready for or capable of a skill upgrade. Do we just throw them on the discard pile? Yes we do, we just raise the Core Unemployment number. Mission accomplished by academics! How brilliant a solution, and so elegant. No?
The Clinton administration was rescued by the rise in productivity due to the widespread introduction of personal computers into the business world. Skilled engineers could now do the work of secretaries, technical editors, and data entry technicians. So the number of employees shrank and skilled labor could now do much more menial tasks. There's a new skill set, right? Clinton's advisors felt the new personal computer industries would never export their jobs. Wasn't that a great assumption. Is there a single personal computer made in this country? (As of a few years ago there was one assembled here for gamers,) The freshwater group had obviously never sledded on a slippery slope when they were kids. An additional wonderful effect was the need for the economists to redefine the natural base level of core unemployment from less than 2 percent to 5 percent. They are now talking about 6 to 7 percent. Will it ever occur to them that exporting jobs leaves people unemployed or under employed? Hasn't occurred to them yet.
The Bush administration actuated a new national policy to eliminate all governmental oversight, regulation, and control of business and financial activity. That encouraged implementation of wild get rich quick schemes of the banking and energy industries which lead directly to the current collapse. We are approaching proximate causes.
Under Clinton and Bush, the internet bubble masked the decline of real wages, and the effects of rising core unemployment. Clinton exited just in time to avoid recognition for causing the reduction in real wages due to his push to export our manufacturing jobs. NAFTA for example.
A major root cause of the current disaster is the lack of oversight and regulation of the derivatives market under the Clinton and Bush administrations.
Regulation by the Commodity Futures Trading Commission (CFTC) was strenuously opposed by Federal Reserve chairman Alan Greenspan, Treasury Secretaries Robert Rubin and Lawrence Summers. On May 7, 1998, former SEC Chairman Arthur Levitt joined Rubin and Greenspan in objecting to the issuance of the brilliant and effective Brooksley Born's CFTC’s concept release. Their response dismissed Born's concerns out of hand and focused on the possibility that CFTC regulation of swaps and other OTC derivative instruments would increase legal uncertainty of such instruments, potentially creating turmoil in the markets, and reducing the value of the instruments.
Further concerns voiced were that the imposition of new regulatory costs would stifle innovation and push transactions offshore. Bur pushing jobs offshore where labor is cheaper was AND IS part of their religious mantra. So why not these jobs? Oh, yes of course, these were jobs in their own fields. Don't forget, this is an industry near and dear to these non-regulation minded Federal "regulators." Only MANUFACTURING JOBS should be pushed offshore! (Prior posts I address the feasibility of keeping design jobs Onshore when the manufacturing has gone Offshore. That's another one of the absurd freshwater economists' religious dogmas.
The Bush administration added a number of additional proximate causes to the present debacle. Its mantra of deregulation is a primary proximate cause. The repeal of Glass-Steagell was a major proximate cause. The repeal, engineered by Senator Phil Gramm, of the second Glass–Steagall Act (the Banking Act of 1933), see below, lead to the energy, housing, banking and derivative instrument "manufacturing" and trading bubbles that masked the decline in US real wages and GDI.
The lack of oversight and regulation of derivatives by the CTFC morphed into a proximate cause from it's original status of a root cause when AIG was revealed to be insolvent. The survival of the pension plan of a dear friend of mine, and many others I imagine, depends on the survival of AIG, which basically insured the crap they bought.
The Bush administration could no longer hide the decline of real wages, taking into account real, not "core," inflation. To deal with the drop in US gross domestic income, they encouraged the banking industry to engineer a rise in housing prices. That way, most people's apparent wealth and the GDI would appear to rise as along with the amazing rise in the "value" of their house.
This was supported and encouraged by Senator Barney Frank who saw it as a way for more people to realize the American dream. He was not an expert on deregulation effects. It is not clear that he could have anticipated the resulting, totally fraudulent securitization industry in which Henry Paulson and other bankers, mortgage initiators, and financial houses played a dominant role. That was another proximate cause.
The Bush administration apparently encouraged credit rating firms like Moodys, and Standard and Poors, to rank worthless securitization garbage as AAA. I often wondered about the seemingly inexhaustible supply of credit available to fund ill-considered (stupid?) mergers and acquisitions. Those sources of credit were in fact totally fictitious, non-existant, and fraudulent. Another proximate cause identified.
Ain't deregulation grand?
Note: I really should go back and add a list of bullets on the proximate cause of the collapse, and I may do that in a follow up post. However, my main purpose in writing this was to address a good friend's underlying assumptions of Reagan's role and effects. I loved Ronnie!!!! I have not addressed the positive effects of some of his ideas and style.
Interesting Note: April 21st: Moody's was slapped with a subpoena since the credit rating agency is not cooperating with Crisis Investigators
The panel created to investigate the roots of the financial crisis slapped credit rating agency Moody's Corp. with a subpoena Wednesday for failing to turn over key documents.
It's the first subpoena issued by the Financial Crisis Inquiry Commission to compel compliance, the panel's chairman, Phil Angelides, said during a conference call with reporters. The commission faces a December deadline to produce a report documenting and explaining the causes behind the worst financial crisis since the Great Depression.I am very pleased this committee's work.
A major root and proximate cause of the current disaster is the lack of oversight and regulation of the derivatives market.
Commodity Futures Trading Commission (CFTC) regulation was strenuously opposed by Federal Reserve chairman Alan Greenspan, Treasury Secretaries Robert Rubin and Lawrence Summers. On May 7, 1998, former SEC Chairman Arthur Levitt joined Rubin and Greenspan in objecting to the issuance of the Brooksley Born's CFTC’s concept release. Their response dismissed Born's concerns out of hand and focused on the possibility that CFTC regulation of swaps and other OTC derivative instruments would increase legal uncertainty of such instruments, potentially creating turmoil in the markets, and reducing the value of the instruments. Further concerns voiced were that the imposition of new regulatory costs would stifle innovation and push transactions offshore.
An economic and financial crisis affected US and world markets in 2008. As it gained momentum, newspapers began reporting on some of its possible causes, including the rejection of the CFTC's proposals and the adversarial relationship Greenspan, Rubin and Levitt had with Born. The disagreement has been described not only as a classic Washington turf war, but also as a war of ideologies as Greenspan and highly placed Clinton administration officials believed that, in large measure, the capital markets could be trusted to regulate themselves.
Born declined to publicly comment on the unfolding 2008 crisis until March 2009 when she said: "The market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been." She also lamented the influence of Wall Street lobbyists on the process and the refusal of regulators to discuss even modest reforms.
The effects of repealing Glass-Steagall - One or More Proximate Causes
Shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision -- lobbied for by Enron, a major campaign contributor to Gramm -- that exempted energy trading from regulatory oversight. Basically, it enabled the Enron debacle and ushered in the new era of unregulated securities. Interestingly enough, Gramm's wife, Wendy, had been part of the Enron board, and her salary and stock income brought in between $900,000 and $1.8 million to the Gramm household, prior to the passage of the Commodity Futures Modernization Act.
In 2003, Gramm left the Senate to join UBS, which had acquired investment house PaineWebber due to his deregulation bill. At UBS, Gramm lobbied Congress, the Fed and the Treasury Department. During Gramm's tenor at UBS and as a lobbyist, Congress passed the Responsible Lending Act, billed as an anti-predatory-lending measure, but was called the "Loan Shark Protection Act" by consumer advocates, as it was designed to preempt stronger state laws against anti-predatory lending. The Fed largely ignored the underlying and growing problems within the subprime mortgage/housing markets, as Bernanke famously acknowledged the housing market in April, 2007 as, "[showing] signs of softening," but said that a "sharp slowdown," is unlikely. Henry Paulson former head of Goldman Sachs became the Treasury Secretary in July, 2007, when, In 2005, Goldman [he] securitized $68 billion in residential mortgages and $23 billion in 'other assets' primarily related to CDOs," With such self-interest, and a lack of the nation's interest, we can see how this subprime mess was allowed to escalate to such great proportions.