DrSteveB has a top notch diary on the rec list right now called Congress Passes Wide Ranging Bill Easing Bank Laws. It's a damn fine read. He takes us back to the Gramm Leach Bliley act and shows us who was right at the time. Despite the pervasive meme, PEOPLE KNEW it was a bad idea.
Lets tag one more on top of that. How about the Commodity Futures Modernization Act (CFMA) of 2000? It contained the Enron loophole, which fueled both the Enron disaster, as well as the exorbitant gas (and other commodities) bubbles of the last six years. The New York Times the next day predicted the collapse we have just lived through. Quotes after the fold..
This link doesn't work anymore and I can't find the original article. But it was working in Dec when I wrote this diary
On Dec 20, 2000 the CFMA passed. The New York Times had astory the next day which was ominous. Dec 21, 2000.
At the eleventh hour last Friday night, Congress passed a measure that will benefit Wall Street at the expense of the average investor...
The bill, the Commodity Futures Modernization Act of 2000, which passed after an intense push by Wall Street lobbyists, changes the financial markets in two ways. First, it lifts a longstanding ban on futures trading in individual stocks, thus allowing investors to buy shares through brokers with very little money down. Second, it protects a lucrative business for bankers -- the private financial contracts known as swaps -- from being regulated, for the most part. Investors are affected by swaps because they are used by many mutual funds and publicly traded companies. (In a swap, one party bets that an economic variable -- interest rates, for instance -- will go up, while the other bets on its going down.)...
It's not surprising that Wall Street lobbied for the new rules. The major banks and investment houses, chock-full of investment bankers, brokers and traders, will earn big commissions and trading profits on single-stock futures contracts. As always, they will make money regardless of whether their customers do.
But the new single-stock futures bill could be dangerous -- for the market as well as for individual investors. As the vast literature on behavioral economics shows, people aren't all that rational when it comes to financial risk. And there's the danger that investors who bet wrong will simultaneously dump their portfolios to pay their debts to brokers, causing stocks to crash...
Think of the 1920's, when investors borrowed heavily to speculate -- their collective debt 10 times the value of their collective down payments. We all know what happened after that...
Wall Street makes much more money from these unregulated transactions than it does from futures trading, and the pressure on legislators intensified in Congress's waning hours. At a minimum, the question of swaps regulation deserved more scrutiny by lawmakers...
As for the question of single-stock futures trading, next year, you can expect more calls from your broker, who may try to sell you on what Oscar Wilde once said: ''The only way to overcome a temptation is to yield to it.''
People knew. Paul Krugman has been sounding alarms since I first knew what economics was. Here's a quote from the Great Unraveling 2003.
From a Fortune Article in 1997 where Paul visited a group of money managers.
Here's what I learned: the seven habits that help produce the anything-but-efficient markets that rule the world:
- Think short term- A few people in that meeting tried to talk about the long term--about what kind of earnings growth U.S. corporations might be able to achieve over the next five years. This sort of thing was brushed off as being too academic...
- Be greedy...
- Believe in the greater fool. Several money managers argued that Asian markets have been oversold, but that one shouldn't buy in until those markets start to turn around--just as others argued that the U.S. market is overvalued, but they didn't plan to sell until the market started to weaken... Implicitly they all seemed to believe that the strategy was safe, because there is always someone else dense enough not to notice until it really is too late.
- Run with the Herd. You might have expected that a group of investors would have been interested to hear contrarian views from someone who suggested that the U.S. is on the verge of serious inflationary problems, or that Japan is poised for a rapid economic recovery...which would have offered a nice challenge to CW. But no: the few timid contrarians were ridiculed. The group apparently wanted CW reinforced, not challenged.
- Overgeneralize. I was amazed to hear the group condemn Japanese companies as uncompetitive, atrociously managed, unable to focus on the bottom line...
- Be trendy:
- Play with other people's money: If, as I said, the people at that meeting were very smart, why did they act in ways that seem so foolish? Part of the answer, I suspect, is that they are employees, not principals; they are trying to make money and careers for themselves. In that position it is hard to take a long view....
One thing that I am sure of is that the Asian leaders who have been fulminating against the evil machinations of speculators have it wrong. What I saw in that room was not a predatory pack of speculative wolves: It was an extremely dangerous flock of financial sheep
More from The Great Unraveling (should be titled I Told You So)
"Jan 15, 2002 - Crony Capitalism, U.S.A.
Four years ago, as Asia struggled with an economic crisis, many observers blamed "crony capitalism." Wealthy businessmen in Asia didn't bother to tell investors the truth about their assets, their liabilities or their profits; the aura of invincibility that came from their political connections was enough. Only when a financial crisis came along did people take a hard look at their businesses, which promptly collapsed.
Does this sound familiar?"
And we'll finish with one more..
Aug 16, 2002
Back when I first got professionally obsessed with Japan's problems, around four years ago, I made myself a mental checklist of reasons that Japan's decade of stagnation could not happen to the United States. It went like this:
- The Fed has plenty of room to cut interest rates, which should be enough to deal with any eventuality.
- The U.S. long-term budget position is very strong, so there's plenty of room for fiscal stimulus in the unlikely event interest rates cuts aren't enough.
- We don't have to worry about an Asian-style loss of confidence in our business sector, because we have excellent corporate governance.
- We may have a stock bubble, but we don't have a real estate bubble.
I've now had to strike the first three items from my list, and I'm getting worried about the fourth.
Please, can we take nobody could have known off the table? There were articles at the time by people who knew. I guarantee if these new banking laws had resulted in massive prosperity for all, Phil Gramm and the Deregulators would be bragging on it.
Though I don't like his prescription for getting out of this crisis, Peter Schiff diagnosed this sickness perfectly.
Update: I added a link for people who might want to know more about the CFMA
Update 2: OK people aren't loving this diary. Lets talk about something else. I got a kitten who is six months old. I live in a somewhat rural area. There's a road maybe 30-40 yards from my place. It's not a busy one, it just connects to two or three houses and deadends. We've got coyotes and bobcats, and a neighbor Huskie that I don't trust. Should I let my cat be an outside cat with those risks? It certainly is what he wants. In the past we've lost 1/2 outside cats, either running away or getting eaten.