Note: This is part 1 of a series on the (mostly) legislative history of financial deregulation that has contributed to our current financial and economic crisis. For the entire series, including the timeline (where most of the reference links are), see the Financial Regulation Timeline page. Please use the comments to contribute links and other information. Thanks, selise.
It has become conventional wisdom among Democrats that Republicans (epitomized by Phil Gramm, past chair of the Senate Banking committee) were responsible for pushing deregulation that "set the stage for the financial meltdown." But what about the Democrats? Have their policies been supportive of the regulation that would have prevented what has been called the greatest financial crisis since the Great Depression? Answering this question has become more important as Obama puts together an economic team that includes names from the era of deregulation.
Looking back through the legislative and administration record since the early ’90s, what emerges is not primarily a partisan battle of Democrats vs Republicans, although that was part of it. The battle was one of the majority of Congress (usually under Republican control) allied during the Clinton administration with Treasury (Rubin and then Summers), the Fed (Greenspan) and the SEC (Levitt, who now says he regrets his role) against a few people in Congress (Markey) and the CFTC (Born and Greenberger) who thought that over-the-counter (OTC) derivatives should not be left entirely unregulated.
Other regulatory issues, for example, the repeal of Glass-Steagall, exceptions from the Investment Company Act of 1940, exclusion from the Commodity Exchange Act (CEA) for some electronic trading systems for financial products contracts (aka, "the Enron loophole"), the use of Structured investment vehicles (SIVs) by mortgage lenders for off-balance-sheet accounting, changes by the SEC to release investment banks from the "net capital rule," credit rating agencies that are paid by the companies they rate instead of investors and the practice of using marking to model as a means of "marking to myth") when no liquid market exists for accurate marking to market have also been reported as contributing factors, but the complete lack of regulation for OTC derivatives such as credit default swaps (CDSs) is one of the most important and at this time, probably the most dangerous. So, the series will begin with OTC derivatives, to be followed by other issues as time and interest permit.
x-posted at oxdown