Dorgan: Financial Regulation Not a Four-Letter Word

Congress must pass strong, effective financial regulations to prevent another economic meltdown and to protect the American consumer, a leading senator said. Speaking this morning at the New America Foundation [1], Sen. Byron Dorgan (D-N.D.), said the nation’s economic wreckage can be traced back to the decision a decade ago to deregulate the financial system.  

Not only did deregulation open up opportunities and incentives for risky banking behavior, but federal regulators who were supposed to be watching the financial industry weren’t doing their jobs, Dorgan said.

As early as 1994, Dorgan warned of the risks posed by one of the key ingredients in the recent financial collapse: the complex financial packages known as derivatives. In a Washington Monthly magazine cover story, “Very Risky Business,” he predicted the cascading failures of large lending institutions, the collapse of Fannie Mae, taxpayer-funded bailouts.

The current economic mess grew out of an “avalanche of greed,” he said, after the passage in 1999 of the Gramm-Leach-Bliley Act, which repealed Depression-era banking regulations. He was one of only eight senators to oppose the bill, and at that time he said deregulation “would raise the likelihood of future massive taxpayer bailouts.”

The best solution now is to establish regulations that restore protections to the financial system for consumers, Dorgan says. We should regulate derivatives and hedge funds and separate traditional banking from risky speculative investment banking, he says.       

During a question and answer session, Dorgan said “regulation is not a four-letter word.”          

Regulation is essential for a free market system. You need a referee to call fouls when someone breaks the rules. We must have much more aggressive regulation to make [financial reform] work.

 A recent poll shows Americans want strong regulation [2] of our nation’s financial markets. The poll showed that more than two-thirds of voters surveyed support creating a Consumer Financial Protection Agency to look out for consumers.

Congress must also address the issue of what to do with those banks that have been dubbed “too big to fail [3],” Dorgan said. During a recent forum sponsored by the Economic Policy Institute (EPI [4]), panelists pointed out that the nation’s four largest bank holding companies control nearly half of the bank assets in the country—almost double the amount they controlled in 2002—not a good situation for our economy.

 The biggest threat: All these banks are carrying billions of dollars in bad debts. Their weak balance sheets make them hesitant to lend the so-called zombie bank phenomenon. But their financial weakness is paired with political power, power that may not be consistent with our democratic principles, says Damon Silvers [5], deputy chair of the Congressional Oversight Panel. Silvers also is associate general counsel for the AFL-CIO.

 Dorgan added that he does not put much faith in the latest stockmarket rally which was triggered by huge profit statements by Wall Street investment banks.

 The most important fact about the long-term growth of this economy is not how much an investment bank made. [It's] how many people are put back to work. A good job that pays well is better than any social program I know.

You can check out a video of Dorgan’s speech here [6].

Cross-posted from the AFL-CIO Now Blog! [7]