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Editorials published by the
Goffstown Residents
Association are written by various members and
contributing non-members of the GRA. |
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October 30, 2008
GUEST EDITORIAL
Spitzer and Sarbox Were Deregulation?
By JAMES FREEMAN, Wall Street Journal
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In this fall's first presidential debate, Barack Obama analyzed the causes of the credit meltdown. "Now, we also have to recognize that this is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain, a theory that basically says that we can shred regulations and consumer protections and give more and more to the most, and somehow prosperity will trickle down."
In the second debate, Mr. Obama offered a similarly vague diagnosis: "I believe this is a final verdict on the failed economic policies of the last eight years . . . that essentially said that we should strip away regulations, consumer protections, let the market run wild, and prosperity would rain down on all of us."
Could Mr. Obama really believe that the era of Sarbanes-Oxley was about letting "the market run wild"?
One had to look far and wide in the spring of 2002 to find anyone who thought the Sarbanes-Oxley law was an experiment in cowboy capitalism. For example, on its front page of April 25, 2002, the New York Times reported: "House and Senate negotiators agreed . . . on a broad overhaul of corporate fraud, accounting and securities laws aimed at curbing the rampant abuses that have shaken Wall Street . . . Some lawmakers called it the most sweeping securities legislation since the 1930s." The Times added that "business and accounting industry lobbyists had tried in recent days to soften the measure, but they got nowhere."
Of course, in the years since this sweeping securities legislation was enacted, its costs -- borne by public companies, and therefore by investors -- have been many times official estimates. And with the benefit of time, even liberal Democrats such as New York Sen. Charles Schumer came to realize that the regulatory monster created by Sarbanes-Oxley had to be tamed.
Mr. Schumer was so concerned about the migration of business from Wall Street to London, Hong Kong and even Dubai that he joined New York City Mayor Michael Bloomberg in commissioning a study of the problem and potential solutions. When the study was released in January 2007, Messrs. Schumer and Bloomberg wrote in an accompanying note that "our regulatory framework is a thicket of complicated rules." They warned that without reform, "we will no longer be the financial capital of the world."
As heavy as was Washington's hand upon the financial markets beginning in year two of the Bush era, New York Attorney General Eliot Spitzer may have imposed even greater costs on Wall Street. Dusting off the 1921 Martin Act -- an antifraud statute so broad that it does not even require prosecutors to demonstrate criminal intent -- Mr. Spitzer forced a series of costly settlements that made Wall Street's traditional business of underwriting stock offerings much less profitable.
The excesses Mr. Spitzer sought to prevent were clear at the time; only later did the collateral damage to America's markets become manifest, as New York lost business to London and elsewhere.
In a 2004 Slate column, Daniel Gross described the initial impact when Mr. Spitzer targeted the insurance industry. "In response, the stocks of the biggest players implicated, Marsh & McLennan and AIG, have tanked, losing a combined $38 billion in market capitalization. More alarming for the insurers, Spitzer signaled this was just the beginning of an industry-wide investigation. For when he finds a few bad eggs, Eliot Spitzer cleans out the entire coop and changes the way it is run, as Wall Street's investment banks and mutual funds have learned to their dismay."
Mr. Spitzer would ultimately drive the CEOs of both Marsh and McLennan and AIG from office, with disastrous consequences for shareholders. In the case of AIG, the staggering extent of the disaster has lately been revealed.
The combination of Mr. Bush's enactment of Sarbanes-Oxley and Mr. Spitzer's Wall Street prosecutions contributed to America's significant market-share loss of initial public offerings -- and the U.S. is yet to return to pre-Bush levels. While government reduced the profit-making potential in Wall Street's traditional bread-and-butter business, it was simultaneously encouraging investment in the housing sector. Neither activity constituted deregulation.
Perhaps Mr. Obama is looking beyond the financial markets and taking a broad view of the economy in concluding that Mr. Bush was a deregulator. If so, it's hard to find evidence to support this conclusion.
Wayne Crews of the Competitive Enterprise Institute tracks regulation across the entire federal government. He reports that the Bush administration set an all-time record in 2004, when it published more than 75,000 pages of proposed and enacted rules in the Federal Register.
Leftists might assume that many of these rules were actually watering down earlier standards -- but where's the evidence of declining compliance costs? Lafayette College economist Mark Crain estimates more than $1.1 trillion in federal regulatory costs for 2004, up an inflation-adjusted 16% from 2000. Overall agency enforcement budgets have increased each year since 2004.
A recent report, "Regulatory Agency Spending Reaches New Height," from Washington University's Weidenbaum Center puts Mr. Bush's regulatory activity in historical context. Co-authors Veronique de Rugy and Melinda Warren say that when it comes to spending on regulatory agencies, our current president is almost in a class by himself, with an increase of almost 68% during his two terms. In constant dollars the Bush regulatory budget increases vastly exceed those of predecessors Clinton, Bush, Reagan, Carter, Nixon and, yes, Lyndon Johnson.
Looking at regulatory spending in percentage terms, Mr. Bush's staggering 2003 increase of more than 24% was the largest in the last 50 years. If Mr. Obama considers this a record of deregulation -- and if current polls hold -- America's economy could be in for a very long four years.
Mr. Freeman is assistant editor of the Journal's editorial page.
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