In a better world the Goldman Sachs civil suit brought by the Securities and Exchange Commission would not be necessary.  We had that better world after the financial reforms of the Great Depression, but over time we lost our collective memory about the “why” of those reforms, and thus began a 20 year effort to dismantle them beginning in the 1980s.

The SEC is charging Goldman with fraud.  It alleges that a billion dollar derivative security (a collection of mortgages bundled into various levels of asset quality, in this particular case) was sold by Goldman without the proper disclosures.  One alleged non disclosure, the SEC maintains, was that a large hedge fund that “shorted” this security (bet against it working, in other words) was able to influence what mortages were selected for inclusion in this derivative.  The security went bust and investors lost their money.  Some were professional investors charged with protecting worker pension funds and the like:  These losses were not limited to wealthy investors, in other words.

Why did we turn our back on the financial markets we once had and prospered with?  We lifted leverage restrictions.  We lifted the prohibition between investment banking and commercial banking.  We allowed complex security “innovations” to proliferate unchecked without common sense disclosure rules.  We looked the other way as “shadow banking”  grew outside of regulatory purview.  Worse, our government policies, including tax policies, encouraged the growth of this shadowy world of hedge funds and other non bank (and thus unregulated) financially important corporations.

Why did we do this?  Why did we forget the hard lessons of the 1930?  Why did we let the same old problems of greed arise once again?

Two reasons.  One is we forgot that any industry, over time, tends to consolidate.  As dominant corporations accumulate ever greater market share within their respective industry they naturally use their growing power and influence to diminish, or eliminate entirely, competition.  Concentrated power anywhere, whether in government or in private industry, wants to eliminate the competition.

The second reason is that, beginning with President Ronald Reagan in the 1980s, the concept of government’s role in economic life was redefined in a very corrosive way.  Reagan ridiculed government’s proper role of prohibiting economic abuse, of protecting its citizens from fraud, of using its power of trust busting and sensible regulation to preserve competition in our private, capitalist system.

In pure populist terms Reagan declared government “Was the problem.  Not the solution.”  We took his rally cry literally.  We began to completely believe that capitalism, if only left unfettered, and government, if only muzzled, would result in fair and balanced economic growth.

And thus we laid the groundwork for learning, once again, that capitalism is not the refined economic engine in which we’d been led to believe.  We learned, once again, that capitalism is perfectly capable of  producing massively negative “unintended consequences” equal in scale to those that can be produced by governments. 

And along the way we forgot our ethics.  It’s not supposed to always be about the money.  In fact, quite the opposite is supposed to be true.  It’s supposed to be about honesty, responsibility and a real desire to protect and honor customers.  If these are one’s guiding principals, then capitalism does what it is supposed to do: Provide product, jobs and income fairly, honestly and responsibly. 

And government’s role in all this is to enforce laws and regulations aimed at preventing dishonest, irresponsible acts that violate the trust of the people–the consumers of America.  That’s the government’s job.  The job Reagan ridiculed.  

There’s only one corporate entity in America whose sole purpose is to protect American citizens.  That’s the one formed by the Constitution on behalf of all American citizens.  No capitalist private charter, no private incorporation, has this responsibility.  That we put this responsibility in private hands was beyond foolish.

That we collectively forgot this obvious fact destroyed our ethical base and, inevitably, brought the economy low. 

There are still those who believe Capitalism alone brings jobs and income for all.  That free markets are superior to our Constitution.  That they are superior to government.

Making the most money one can, in the shortest amount of time, is not an ethical approach.  It is unethical.  Selling a product that cannot be easily understood presents ethical challenges.  In finance, being an intermediary between buyer and seller, while holding a non disclosed position in the exchange, is unethical. 

Breaking the financial tether between the insured and what is insured (the essence of credit default swaps) opens wide the door for unethical behaviour.  Letting those who purchase such “insurance” to modify even those contracts, and then leverage their “bet” on these security “innovations,” lifts unethical behaviour by another magnitude.

Financial intermediation is a service.  When it works well, it effectively matches productive enterprises with capital from private investors.  As soon as the intermediaries begin participating as investors in these exchanges, the possibility of self dealing or other unethical behaviours increases dramatically.    Full disclosure, honest representation of risk, responsible measure of asset values–and many other important considerations–can and will come under assault when the intermediary participates as a principal.

The only protection (when ethics are tossed out the window) is a government that has the regulatory power, and the ability of expert and dedicated employees, to enforce what the average citizens considers fair dealing.  

So once again we must reinstall strong financial regulatory legislation with real “teeth.”  And we then must appoint fair and honest administrators who understand that it is they who are the masters, not the corporations they keep honest and the industries they keep competitive.

Once again we will have learned the truth of FDR’s statements in his 1936 inuagural address, uttered after four years of fighting the Great Depression.

“In fact, in these last four years, we have made the exercise of all power more democratic; for we have begun to bring private autocratic powers into their proper subordination to the public’s government.  The legend that they were invincible–above and beyond of the processes of a democracy–has been shattered.  They have been challenged and beaten.”

I’ve written a number of posts about this important subject: FDR and the philosophy he believed in.  Without understanding FDR’s philosophy, one can’t understand how he accomplished what he did.

FDR made many brilliant observations during his four terms as President, but none so important to remember as those he made in his first two Inaugural addresses during the throes and misery of the Great Depression.

After fighting the Depression for four years, in his second Inaugural FDR said:

“Nearly all of us recognize that as intricacies of human relationships increase, so power to govern them also must increase–power to stop evil; power to do good.  The essential democracy of our Nation and the safety of our people depend not upon the absence of power, but upon lodging it with those whom the people can change or continue at stated intervals through an honest and free system of elections.  The Constitution of 1787 did not make our democracy impotent.

In fact, in these last four years, we have made the exercise of all power more democratic; for we have begun to bring private autocratic powers into their proper subordination to the public’s government.  The legend that they were invincible–above and beyond of the processes of a democracy–has been shattered.  They have been challenged and beaten.”

Beezer here.  Can you imagine President Obama making such a statement of philosophy today?  If you find it hard to do so, then you are at the beginning stages of realizing why we find ourselves today in such a mess, in a quagmire of indecision and partisanship.  We have forgotten what our government is supposed to be.  And this isn’t the first time it’s happened either.  FDR had to directly address this forgetfulness in his first Inaugural address.

In that address, FDR fingered the bad guys and made no mistaking of his resolve possible.

After noting the nation’s problems FDR said:

“Primarily this is because the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated.  Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

True they have tried, but their efforts have been cast in the pattern of an outworn tradition.  Faced by the failure of credit they have proposed only the lending of more money.  Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence.  They have no vision, and when there is no vision the people perish.

The money changers have fled from their high seats in the temple of our civilization.  We may now restore that temple to the ancient truths.  The measure of restoration lies in the extent to which we apply social values more noble than mere monetary profit.”

Can you imagine one our our leaders saying this?  Probably not.  And therein lies the core of our nation’s problems.  But FDR wasn’t finished with this theme.  In the same address he followed with these sentiments.

“Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing.  Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, on unselfish performance; without them it cannot live.”

Mired in our cynicism and lack of trust, we cannot today imagine someone standing up and espousing such common sense.  It’s possible we wouldn’t know how to respond.  But as for action, FDR identified the number one priority of his first term.

“Restoration calls, however, not for changes in ethics alone.  This Nation asks for action, and action now.

Our greatest primary task is to put people to work.  This is no unsolvable problem if we face it wisely and courageously.  It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources.”

I think Obama needs to start sounding a lot more like FDR.  In fact, I think he needs to start quoting him directly and often.  To try and “modernize” these sentiments would diminish their insight.  To quote one of the Nation’s most revered Presidents would capture some of what we’ve lost.

FDR encapsulated better than anyone the need for a Nation to demand ethical behaviour from both its Government and its businessmen.  The misogynist philsophy of the Republican Party, that corporations can be trusted above our government, is so misguided in light of history that it amazes. 

It’s time Obama publicly remind the Nation of FDR’s philosophy:  A philosophy that left absolutely no doubt that the public’s government comes before private corporations.  FDR did not apologize when he closed thousands of banks.  He did not apologize when he directly hired millions of unemployed men.  He didn’t have to because he had communicated a clear philosophy that demanded ethics from everyone and most decidedly favored the public’s corporation:  The United States government.