Robert Reich: This is Not the Time to Deregulate

Robert Reich says to be wary of the push to deregulate Wall Street:

When the Bushies Meet with Wall Street, Watch Your Wallets, by Robert Reich: Top Bushies, including Cheney and Treasury Secretary Paulson, are talking with Wall Street honchos this week about how to make life easier for the securities industry by getting rid of some post-Enron regulations and shielding the industry from liability from shareholder lawsuits. The thinly-veiled rationale for this mutual kiss-up is that American securities markets are supposedly becoming less competitive in world markets.

As I've noted before, the idea that American capital markets are losing their competitiveness is complete and total nonsense. Returns to the financial sector in the U.S. continue to be higher than in any other sector of the economy – now higher than ever before. Investment bankers .... Top traders ... hedge fund managers ... Private-equity managers, the managers of large pension and mutual funds, and the rest, are raking in more money they know what to do with.

It’s true that the percent of big global initial public offerings listed on U S stock exchanges is declining while the percent of initial public offerings done through financial centers in London, Hong Kong, and elsewhere is rising. .. But this doesn’t mean Wall Street is becoming uncompetitive. Capital markets are now global. So of course other financial centers are going to gain a larger share of IPOs. Meanwhile, Wall Street is doing deals all over the world. Mergers and acquisitions in Europe, China, Latin America. Hedge funds taking in money from all over the globe.

American capital markets are fully competitive. America is still the world’s largest magnet for foreign capital. ... In fact, foreign companies that list both on a US and a foreign stock market typically trade at a premium over foreign firms that list only outside the US. Why are investors willing to pay more for listings in the US? Because the US capital market is more stable and transparent, and its tough accounting standards give investors better protection. In other words, because of the very regulations that the Bush Administration and its Wall Street cronies wants to get rid of.

The threat of another Enron or Worldcom hasn’t gone away. Executive suites are still reeling from the scandal of back-dating executive stock options. Small investors continue to be wary. Even if the Street weren’t doing better than ever, even if it weren’t already so competitive it doesn’t know what to do with all its money, this is not the time to deregulate.

Here's more on this topic, as well as Robert Reich's comments on the attorney firings and details of his date long ago with Hillary Rodham Clinton: Link to video.

Comments

[reason]

Actually,
just an aside - why would it matter if the American Securities industry was becoming less competitive? It doesn't seem to bother too many people when other industries (say textiles) become less competitive.

[anne]

The textile industry has been changing and becoming selectively less competitive through America for a century. Nonetheless, textile manufacturers continue to operate even in New England. A study of a century of change through the industry would be interesting, but protection of the industry has and has not been in irder for a century.

[real person from the real world]

Reich says: In fact, foreign companies that list both on a US and a foreign stock market typically trade at a premium over foreign firms that list only outside the US. Why are investors willing to pay more for listings in the US? Because the US capital market is more stable and transparent, and its tough accounting standards give investors better protection.

This also answers some of the concerns that foreign investors will dump our IOUs. By nature, even foreign entrepreneurs are highly conservative with descretionary investing. The US has been the blue chip standard for investing. Most global markets have not been as stable, nor have they provided the average returns that US markets have been providing. Some spot markets do well, but overall, the US financial markets are more stable and provide an overall better return.

[lonesome moderate]

Of course it should bother people if the securities industry becomes uncompetitive. If a particular industry becomes uncompetititve because of the workings of the free market, there is normally no reason for the government to interfere--I'm not saying that every industry we've lost was like that, but most of the textile jobs that we lost were a classic case of what we didn't need. Prevailing wages, benefits, and working conditions in most of the industry were third world level, so it's not surprising that most of the jobs went there.

The competitiveness of a country's securities industry, though, is in fact largely determined by government regulations. The country that offers the best combination of first, legal protection for shareholders, and second, minimal costs for the companies involved, is the one that in the long run will get the business. The Bush administration, however, appears to belive that it's a simple race to the bottom, that the country that makes it cheapest will win. History has shown that that's not true a million times over, but these people never let the lessons of history trump the desires of campaign contributors.

Incidentally, I'm not saying that Sarbanes-Oxley can't and shouldn't be improved to make it less of a burden. But this could be done without reducing shareholder protections. That won't happen under this government.

[anne]

Lonesome Moderate:

"The competitiveness of a country's securities industry, though, is in fact largely determined by government regulations."

Agreed; quite a thoughful comment. Warren Buffett and John Bogle have long supported less regulatory specifics but more oversight of the securities industry, both have been largely ignored however spectactularly successful they have been.

[save_the_rustbelt]

Small investors are going to get hosed regardless, so it probably doesn't matter. Having a cynical morning.

[reason]

I'm not convinced - why doesn't everybody list in HK? Several reasons: - time zones, liquidity, media attention, oh and yes regulation. But I think it is very much a secondary consideration.

[spencer]

I still find it amusing that we are seeing a concentrated public relations effort by many Republican heavy hitters to lobby the Democrats to save them from the heavy regulations imposed on them by a republican Congress and signed into law by a republican president.

[Robert D Feinman]

So requiring our CEO's to certify that they are not crooks makes us less competitive?

What are we looking for, to increase the number of IPO's from companies headed by crooks? That's a real plus for the investing public. It has gotten so in this country that leaders can step up before a microphone and make the most self-serving, mealy mouthed claims and not be laughed off the stage.

Is there no sense of shame anymore?

[anne]

No; there is no country in which relatively small investors are better protected and can do as well as they can here, and that needs to be made clear. Regulation has not been the point in the securities market, but oversight has as New York Attorney General Eliot Spitzer clearly showed.

European or Japanese securities markets are nowhere near as investor friendly as the American market. Nowhere near. A moderately knowledgeable American investor will have a distinct relative advantage over European or Japanese or Australian investors.

[Movie Guy]

there is no country in which relatively small investors are better protected and can do as well as they can here, and that needs to be made clear.

These remarks certainly do not apply to the troubling considerations of derivatives or hedge funds. The U.S. securities system is not leading the way on regulatory requirements for either of these key considerations which have the potential to wreck the U.S. securities investment markets.

The U.S. securities systems is far from perfect at this point. As has happened in the past, the small to midsize investors stand a good chance to be hammered while the heavies will be protected in certain ways.

[Movie Guy]

American citizens should rise up and demand that nothing be deregulated in the U.S. securities industry.

Let this become an election issue. I look forward to that possibility.

[Bruce Wilder]

In linking government regulation to trade in a positive way, Reich brings up what I would like to see become more widely recognized. We should recognize that Reich is pointing at a general factor in national economic competitiveness, a factor which could be promoted as part of a national strategy. The Democrats could successfully focus on "good regulation" to promote the U.S. competitive position in a globalizing world. As Movie Guy says, this could be an excellent electoral issue for Democrats -- uniting the neoliberals with the populists on the side of the angels, while casting the Republicans as the proponents of greed and corruption.

I'd like to see economists, proponents of that Queen of the Policy Sciences ;-) talk less about a vacuous "comparative advantage" and more about how "good regulation" tends to aid "external economies" in situating high-value industries in the U.S.

In addition to securities, one could point to the FDA's positive effects in creating a pharmaceutical industry that leads the world. This is a well-known example. Pharma industries in countries with strict regulation, like the U.S. and Germany become highly competitive internationally, while Pharma in countries like Italy, with no regulation, market sugar pills.

One could point to how the Bush Agriculture Department's inability to regulate U.S. food production has not only led to food poisoning episodes on a regular basis, but jeopardized U.S. exports of beef to the most valuable market, Japan.

I'm sure many other examples could be adduced. And, who knows? Many the practioners of the newly cheery policy science could come up with some bright ideas for reform or initiative.

[fiskhusjim]

I'd go further than that; I'd say that it is high time to re-regulate certain "industries".

I think it is plain policy error, for example, to have a "prisons industry - the American people should be willing to accept the inefficiencies that accompany the decision to punish a fellow citizen. It shouldn't be a profit opportunity; it should be a civic responsibility.

Also, it seems clear that monopolies (real or implied) whose operations are subject to the factors that give rise to economies-of-scale should be regulated 1) as a matter of public policy to prevent fraud and abuse; and, 2) as a matter of economic policy to achieve lower costs and greater eficiencies than are possible by imposing a forced notion of "competition" on such an entity.

[Thomas Daulton]

Call me the devil's advocate to Bruce Wilder, above... I think this is a fantastic time for more Wall Street deregulation! At this point it's pretty much inevitable that the economy in general and Wall Street in particular is about to experience a major, and majorly unpleasant, "correction", even if the Housing Bubble collapse does not spread beyond the subprime mortgage markets.

And we all know that the Bush Administration doesn't do half-measures, at least not when it comes to corporate profits.

So perhaps reform-minded progressives in government and business will have an undeniable example to point to in the future -- to finally get the message across to the general public -- during the next Administration, they can look back and say, "Look, in the summer of 2007, George Bush gave the deregulation fanatics everything they wanted, and immediately afterwards the market had its worst shellacking in seventy years. We've reached the end of the road with deregulation, it's time to re-regulate this puppy in a sensible manner."

I'm being facetious, of course. Nobody in a position of power in business nor government will ever draw that conclusion about re-reglation, for reasons cited by Upton Sinclair: "It is very difficult to get a man to understand something when his salary depends on his not understanding it."

[piglet]

anne, what makes a market "investor friendly"? And what the heck is "competitiveness of the securities industry" supposed to mean? Is a "competitive securities industry" one that produces more securities at a lower price? ;-)

[fred c. dobbs]

It's patently obvious that business always locates where government is weakest. That's why Sierra Leone is the global economic powerhouse.

[save_the_rustbelt]

Eventually Nancy Pelosi will lead the charge to weaken Sarbanes Oxley at the behest of tech companies in California. She will work with the Bush-ites to make enough compromises to get it passed.

[Art]

Piglet, you'll learn not to pay much heed to anne. :)

[piglet]

Well Art, anne is not the one who invented the bit about "competitiveness of the securities industry". I would still like to know what that's supposed to mean...