In the months after I was in the Jesuit Volunteer Corps, I worked in a seafood restaurant and market in Baton Rouge, LA. The experience was not only sociologically and culturally fascinating; I learned, for example, how to boil and cook crawdads in a huge vat. It was also politically sobering. I learned that some of our cooks, all from third-world countries and all female, were essentially forced to work 16 hours a day, six or seven days a week. Their pay: $6-7 an hour. And, I was told, none of the cooks wanted to work the grueling hours.
How could this be I our manager? Easy, I was told: Under state law, businesses with fewer than x number of employees did not need to abide by federal labor laws. Small businesses no doubt had carved out an exemption for themselves. Neither Democrats nor Republicans had taken on the small-business lobby, a politically sacred cow. As a result, cooks and their families suffered. The lesson was instructive: businesses need to be regulated well; if they aren’t, people suffer.
The lesson is equally valid today. On Thursday, I wrote about the bad regulations, supported by both Democratic and Republican administrations, which led to the global financial panic. This afternoon, I will mention another bad regulation, supported by Democrats and Republicans, which caused the financial crisis.
The Securities and Exchange Commission four years ago essentially allowed large investment banks to pile up a mountain of debt without requiring that they have a tractor to get rid of it. As The New York Times tells the story, the overturning of the net-capital rule (not to be confused with the overturning of the uptick or plus-tick rule) was significant:
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The consequences have been terrible. Lehman Brothers filed for bankruptcy. Bear Stearns was sold into a hastily arranged marriage with JP Morgan Chase; Merrill Lynch was sold to Bank of America; and taxpayers are on the hook for at least $29 billion.
The story seeks to pin the blame on Republicans; after all, they controlled the commission that approved the rule and failed to regulate the companies. I take the point that Republicans are more likely to let companies self regulate. Still, I think the story takes its thesis too far.
Democrats were almost as complicit in the de-regulation. Both Democrats on the SEC approved the rule change. And it was a Democrat-dominated SEC that in 1999 failed to give the SEC oversight in regulating parent companies. The Times’ story only mentions these facts only in passing.
In truth, both parties are to blame for this mess. Both embrace the theory of deregulation (Republicans more so than Democrats admittedly). And both ignore the wisdom of Catholic social teaching. As Bishop William Murphy wrote about the financial crisis on behalf of the bishops,
The scandalous search for excessive economic rewards even to the point of dangerous speculation that exacerbates the pain and losses of the more vulnerable are egregious examples of an economic ethic that places economic gain above all other values. This ignores the impact of economic decisions on the lives of real people as well as the ethical dimension of the choices we make and the moral responsibility we have for their effect on people.
It is a lesson that the good cooks of my seafood restaurant could have told you.