The Proper Balance between Industry, Government, and the Public Good

In his first inaugural address, Thomas Jefferson said, “a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement …”  In that sentence lies the answer to this central issue in American democracy … what us the proper balance between industry/private rights, government, and the public good.

First a question.  What does the phrase, “restrain men from injuring one another,” mean?  One could take it quite literally and think that it refers solely to criminal acts.  But early on, government and the courts realized that there were other ways in which men injure others, and so a system of contract and tort law was developed to protect people, as well as businesses, from injury.

During the Progressive era that held sway for most of the 20th century,  the concept was further broadened to include protecting the public good, which in effect means protecting all individuals and businesses.  For example, it is in the public good that small businesses prosper or that we breathe clean air.  Thus a whole system of laws and regulations were enacted to protect the public good from injury from the exercise of unbridled power by corporations.  

Whether it’s labor laws, security laws, environmental laws, or antitrust laws … all of these laws, and the agencies and regulations that implement them, were felt necessary to protect the less powerful from being injured.  And in so doing such laws fulfill the maxim stated by Jefferson.

There was a long time in American history when business operated with virtually no restraints.  But as the industrial revolution took hold, and corporations became very powerful institutions that had no concern other than the making of money, regardless what their impact was on others, government started understanding that it needed to act to protect the less powerful from injury.  

The first federal child labor law was passed in 1916.  Prior to that the Sherman Anti-trust Act and the law setting up the Interstate Commerce Commission were passed around 1890.  Over the next decades, countless laws were passed and regulations enacted to protect individuals, the public, and other businesses (such as farmers and small business owners) from the power of large corporations.

Until the Reagan presidency, it was commonly accepted by both Democrats and Republicans, as well as the general public, that such laws and regulations were critical to government performing its task of “restraining men from injuring one another” or in the words of the Declaration of Independence, “to secure” everyone’s right to life, liberty, and the pursuit of happiness.

This was not an “anti-business” era.  Hardly.  The prospering of business was supported by the government in many ways, in recognition that a robust business community was critical to the strength of the American economy.  But it was a time when government and the people understood that if large corporations were left to themselves, they would trample over everything in their path to making more money.

And so whether it was the Taft-Hartley Labor Laws, the Glass-Steagal Act, the Clean Water Act or the creation of the EPA, these were not “anti-business” measures.   They were measures that reflected the understanding that there needed to be a balance; that while corporations needed freedom to act, that freedom was not absolute.  They could not in so doing injure others, and it was the role of government to protect those who did not have the power to protect themselves against injury from the actions of corporations by retraining them. 

Ronald Reagan, however, brought about the beginning of a fundamental change in this accepted attitude regarding the role of government, both on the part of the Republican Party and a large segment of the public.  He famously said, “Government is not the solution to the problem.  Government is the problem.”

And so began the era of deregulation.  To a large extent, the financial crisis of 2008 that caused the Great Recession can be laid at the doorstop of deregulation … principally the repeal of Glass-Steagall.  Yet despite this event, which was catastrophic for many Americans, the attitude of less regulation is better regulation continues to be the rallying cry for the newly radicalized Republican Party and its Tea Party base.

Somehow, we must restore the meeting of the minds regarding the role of government and the balance our country had struck between private rights, government, and the public good.  How we get to that point I don’t know.  The polarization is so deep; the language of public discourse is so divisive.  Yet we must try or our country will diminish in greatness even as its corporations thrive.

How to Prevent the Next Financial Collapse

The newest scheme that the financial industry has devised to avoid transparency is something called a “deep pool.” Apparently these trading pools have popped up all over the place.  According to the New York Times, on some recent days as much as 40% of trades occurred in such pools, which are totally unregulated and secret.  This has given pause to many.  In Canada and Australia, rules have been passed to limit such off-exchange trading.  But the SEC has shown no inclination to do so.

There appears to be no end to the ingenuity of the industry to come up with products and devise trading mechanisms that will be to its advantage.  But as we have seen all too well, those products and mechanisms can pose grave risks to the economy and the welfare of millions of Americans.

Because the impact and size of the financial industry has grown exponentially from what it was decades ago, and because the risk of its actions are broad-based, the time has come for government to change the way in which the industry is regulated.  The current system pretty much gives the industry freedom to do as it wishes with some after-the-fact regulation.  Instead, the system should be changed to one where a new product or a new mechanism must be first approved by the government before it is put to use.

We do this for the pharmaceutical industry because of the damage that drugs can have on people.  It is done in other industries where environmental impact statements are required before a project can go forward.  The damage from the financial industry’s risky products and destabilizing mechanisms can be, as we have recently seen, even more toxic.  Yes, this would be a pain in the neck for the industry and pose a considerable restraint on its activities ... but that’s just the point.  Such restraint is needed.  And we have seen that it cannot effectively be applied after the fact.

The financial industry has proven that it cannot be trusted to regulate itself.  There are far too many people at positions both high and low who are not ethical and will do anything to make a buck, regardless of its potential risk to the nation’s economy.

In addition, Glass-Steagall must be re-enacted.  This law, which was passed in the 30s to separate commercial and investment banking activities, served us well for 60 years.  But the industry and the Republicans didn’t like it, and so it was repealed in the late 90s and unfortunately signed into law by President Clinton.  

It is the repeal of this law which allowed the monster firms ... those too big to fail ... like Goldman Sachs and JP Morgan Chase to develop and pose the risks that caused the 2008 financial near-collapse.  And those same risks continue to be posed today, as the various efforts to rein in the industry’s actions have been ineffectual at best.  Despite the rhetoric of the Obama administration, not much has changed in this area since pre-2008 days.

Our country is at grave risk.  Congress must act to protect the people from future financial catastrophe.

The Lords of Finance Are Today's Money-Changers in The Temple

At least since the time of Christ, there has been some degree of moral opprobrium in Western culture against making money solely from the use of money.  First he drove the money-changers from the temple (as well as other businesses, but the image remains a classic) and later he spoke against lending money at interest. This opprobrium was so strong that for centuries Christians were prohibited from lending money at interest. That task, so crucial to commercial life, was left to the infidel Jews, who were nevertheless frequently sanctioned for their practices.

In more modern times, the opprobrium has lapsed as we all know, but there remained both a moral opprobrium and a legal sanction against lending at usurious rates … such as the practice of loan sharks. Currently all states have laws against usury that set a maximum legal rate of interest and federal law criminalizes charging twice that amount and attempting to collect it. Making a reasonable profit from one's money has beenn deemed respectable and moral; but making too much was beyond the pale.  In the latter case, one was thought to take advantage of people who were in difficulty.

After the stock market crash of 1929, Congressional hearings revealed that the mixing of commercial and investment banking activities during the 1920s had created conflicts of interest and fraud, which helped bring about the 1929 crash.  To prohibit such practices, Congress passed the Glass-Steagall Act in 1933.

Until its repeal in 1999 by a Republican Congress (and yes, unfortunately signed into law by President Clinton), commercial banks had been prohibited from engaging in speculative investment by being prohibited from owning other financial institutions, such as investment banks. The act basically limited commercial banks to helping individuals and businesses in every-day activities such as holding deposits and making loans.

After the repeal of Glass-Steagall, commercial and investment banking activities could again be combined (that’s how the “too big to fail” banks came into being) and banks were free to play the market for their own benefit.  And have they played! Both before the 2008 financial crisis and since, the large banks, such as the iconic Goldman Sachs, have made fortunes from playing the market … and not in the sense that the individual investor might play the market. They have acted unethically if not illegally.

They have created questionable financial instruments often only to then bet against their own clients who purchased these instruments. They have undermined the global financial system through their enabling countries, such as Greece, to assume huge debt levels off the books and then undermining those same countries by betting against them. They have manipulated the market to the detriment of individual investors, countries, and the general public and they have made fortunes in doing so.

This is an example of capitalism run amok. I think that everyone should be able to make a reasonable profit from the use of their assets. And if someone is producing something unique of value to society, then they should be able to make more than what might otherwise be considered a reasonable amount … such as is allowed by virtue of the patent laws.

But the money made by today’s large commercial investment banks and the way in which they make it add up, in my mind, to ill-begotten anti-social gains. They are beyond the pale. Not only should practices such as derivatives trading and credit default swaps be closely regulated for the safety of the broader economy … which the banks are fighting against tooth and nail … but those gains should at a minimum be taxed at a very high rate to discourage such activity and preferably be made illegal.

The modern-day lords of finance are a cancer on the structure of our economy and as such they need to be controlled with laser-like precision.

Is It Class Warfare or Is It a Cry for Justice?

Over the past three decades this country has experienced rapid growth in income inequality.  While the incomes of those in the top 5% have increased exponentially, especially during the past decade, the inflation-adjusted income of production and non-supervisory workers has actually decreased.  The 2010 census found the number of Americans living in poverty to be higher than at any time in the past 51 years that records have been kept; the poverty rate … 1 in 7 Americans … was higher than it’s been since 1994.  The rich have indeed gotten richer and the poor have gotten poorer.  The middle class has been eviscerated.

Yet in Congress the Republicans, who say they speak on behalf of the average American, instead fight any efforts to regulate the financial industry excesses that brought about the recent/current recession, resist any tax increases on wealthy Americans (although current tax rates are lower than at any time since before the Depression), and in general continue to support government subsidization of industry while seeking savage budget cuts in programs that support middle income Americans and the poor.  All in the name of reigning in the deficit.

This is the context in which Mitt Romney and other Republicans are crying “class warfare” at the protests taking place against the financial industry and at Obama’s call for the rich to pay a minimum tax at least equal to the taxes paid by middle income Americans.

Call it mendacity; call it hypocritical.  But beyond deceit, as Rick Perry so aptly stated when criticizing his fellow Republicans for their stand on immigration, these people have no heart.  Not only have they no heart, they have forgotten the American social contract which has benefited them greatly and under which they have an obligation to support the government’s efforts to help those less fortunate.

It is not class warfare to ask that the rich pay their fair share to support the government.  It is not class warfare to ask that industry be regulated so that the public good is protected.  These demands are a cry for social justice.  They are consistent with the balance that our nation has historically struck between private right, the public good, and government. 

The Republicans seek to fundamentally alter that balance.  They are making war on the American social contract and on the middle class, the poor, and the environment.