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=> Race to the bottom: Anomie, conflict, and deregulation.

Race to the bottom: Anomie, conflict, and deregulation.

Posted by Jeff (Guest) - Saturday, March 25 2006, 0:13:23 (CET) from 70.233.5.2 - adsl-70-233-5-2.dsl.sfldmi.sbcglobal.net Network - Windows XP - Mozilla Website: Website title:

My friend wrote this recently. I enjoyed it so much, I wanted to post it here because it involves corporate ridiculousness relating to "deregulation". - Jeff ************************************************************************* Race to the bottom: Anomie, conflict, and deregulation. Michael Sabbagh Outsiders and Deviants Sociologists interpret anomie as either the ‘sudden normlessness’ created by abrupt change (Durkhiem) or as a constant pressure to achieve culturally prescribed goals (Merton). To extend Merton’s theory, American society simply has one goal: Money (Rosefeld and Messner). To boil down Marxism into a single ‘conflict’ theory is slightly more difficult. For most, it represents the idea that the ‘rich’ and ‘working class’ each have their own interests, with the rich minority trying to maintain power over working class majority with their monies. The working class is so preoccupied with trying to ascend into the rich class that they don’t realize the ‘strength in numbers’ they possess. If the working class were to unite, they could revolt and found a new, more equal, society. The American Heritage dictionary defines deregulation as “The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.” There have been many cases of attempted deregulation throughout American economic history, which have been, by and large, grossly unsuccessful. It is especially of interest when a necessity of American life (electricity, telephone, natural gas, savings and loan, etc…) becomes deregulated, since much more is lost when the implosion occurs. When these types of deregulation take place, anomie and conflict between the classes become heavily pronounced, at which point the regulations are put back in place (and are generally much stricter the second time around). I will focus on the bungled deregulation of the Savings and Loan (S&Ls) industry during the 1980’s and how the exploitation of the new ‘system’ fueled anomie and conflict between the classes. Loading the bullet. Under financial institution regulation with roots in the Depression era, federally-chartered S&Ls made limited types of loans. This was a ‘check’ of sorts to ensure the Federal governments money was not invested in risky business ventures, possibly placing undue burden on the taxpayers. During Jimmy Carter’s presidency, inflation was rising at alarmingly high rates (peaked at 13.5% in 1981). Carter was under heavy pressure to bring this under control, and appointed Paul Volcker as the Chairman of the Federal Reserve in August 1979. Volcker then in turn raised the Federal interest rates, which had a devastating impact on the S&L industry. Most of the working class Americans had no idea of the inner workings of what was going on . They knew that something happened which caused products, services, and loans to become more expensive, and that something needed to be done. Perhaps, the majority of investors knew exactly what was going on and if something was done, it had the potential for huge profits. If so, this gap in perception of the true nature of the circumstances is an example how the rich can exercise power over the working class. Conversely, would the working class have cared to know the true nature? Most likely not, since their ‘purpose in life’ is to contribute to the economy, rather than extract. When Ronald Regan took office in 1981, he inherited these problems and more. Through some aggressive measures in Congress, President Regan was able to largely deregulate the S&L industry . This effectively put federally-chartered S&Ls on equal footing with commercial banks. S&Ls could now pay higher market rates for deposits, borrow money from the Federal Reserve, make commercial loans, and issue credit cards. This was a departure from their original mission of providing savings and mortgages. This is also a clear difference in the party affiliations of Carter and Regan. Regan (a Republican), believed the Federal government should minimize involvement in the market economy, while Carter (a Democrat), felt some was needed. With this new proposal, the S&Ls stood to profit far more than before. While under Federal regulation, S&Ls had predicable returns, profits, and rates. Allowing them to compete in an ‘open market’, while still keeping the Federal government around to ‘bail them out’ (since the deposits were federally insured), the S&L deregulation was overwhelming tipped in favor of the market investors . The average working class American would not have benefited from the deregulation for some time. It is possible, that had the deregulation gone successfully, the working class American would have seen marginally lower interest rates in areas such as mortgages, credit cards, and personal loans. This scenario is unlikely, though. The climate has been set. ‘Working class’ Americans are beaten into accepting interest rates; it is simply part of living in our society. When you borrow money from the rich (banks), you expect to hand them 10% annually for the privilege. Why would the industry suddenly tip in favor of the working class? It is absurd to believe the rich would suddenly give something back to the working class. The excess monies would simply find its way back into the banks pocket without the working class American’s knowledge, which is exactly what happened. As far as the working class knew, nothing changed anyways. Mouthing the Barrel. Soon after the deregulation was finalized, there was an instant flurry of activity. Hundreds of new S&Ls opened all across the country to take advantage of the newly deregulated market. State-chartered S&Ls quickly rushed to become federally chartered because of the associated advantages. This in turn led state governments to change their charters to match the federal government’s. State regulators received payment based on the S&Ls they regulated; if they did not change their practices to mimic federal’s, they would have been out of business. This was an interesting side-effect of the S&L deregulation, which contradicts a core platform of the Republican party (which Regan was a member): Federal government transparency. The state-chartered S&Ls had to ‘race to the bottom’ to catch up, and in doing so, the market widened substantially . When the dust had cleared, not only had the federally-charted S&Ls become deregulated, but effectively the state-chartered S&Ls were as well . There was a certain ‘wild, wild, west’ element across the entire S&L industry. The previous ‘regulators’ were now in charge of promoting the industry, while still lightly overseeing it. This dual-role of rule enforcer and advocate caused much confusion. Effectively, the system was no longer designed for stability; its purpose now was to generate profits - more profits every quarter than the previous. This created intense pressure and competition among the thousands of S&Ls across the country. It’s difficult to accept that something (S&Ls in this case) requiring stability and predictability should be allowed to bend and sway at the whim of investors. These waves needed to be generated, artificially or not, to meet market expectations. Pulling the Trigger. This abrupt change in the regulations created such an anomic environment that it led the Federal Home Loan Bank Board (FHLBB) to report to Congress in March 1998 that ‘fraud and insider abuse were among the worst aggravating factors leading to S&L insolvency’ . The most notorious of the corrupt participants was Charles Keating, and subsequently the “Keating Five”: A group of five senators that were investigated for ethics and criminal violations relating to Keating and the S&L with which he was associated. After months of testimony, it was discovered that all five senators had acted improperly in their dealings with Keating to some degree. The gist of their testimony was that they were simply following the status quo: Keating and his S&L would contribute obscene amounts of money to their campaign funds and the senators wouldn’t ‘hound’ him. In the end, Charles Keating was found guilty in 1992 of fraud, racketeering, and conspiracy, and sentenced to 12 years in jail. Three of the senators saw their political careers ended abruptly due to the fiasco. Cleansing the Scene Years later, the Federal Deposit Insurance Corporation (FDIC) analyzed the economic impact of the S&L deregulation, which was meant to help consumers: From 1986 through 1995, 1,043 (approximately 50%) Federally-chartered S&L institutions failed, holding a combined worth of $519 billion in assets. This was the greatest collapse of United States financial institutions since the Great Depression. As of December 31 1999, the S&L crisis cost taxpayers $124 billion and the S&L industry $24 billion. In August of 1989, George HW Bush passed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA). This act effectively returned the abolished regulations, and S&Ls were now regulated by a dedicated department (the newly created Office of Thrift Supervision). How could something seemingly designed to help matters end up destroying them instead? It seems, the answers lie in the abrupt change; anomie. When an industry is born with regulation, those regulations will penetrate every facet. If they are removed abruptly, you are left with a shell. The ‘open market’ will find new leaders to replace the regulators (in this case, Charles Keating is a fine example) and this new set of ‘regulators’ will set the status quo for the rest, similar to the previous government regulators. Possibly, had the deregulation taken place in phases rather than all at once, it may well have been a success. This way, the intermediate ‘industries’ would have a similar feel from the previous, rather than waking up one morning and having a radically different reality. This phase-in process, most likely, would have been far too time-consuming than the ‘market’ wanted or expected from the deregulation at the time. The S&L deregulation showed that not only was the ‘goal’ to maximize profits as quickly as possible, but to also do so with complete disregard for the working class taxpayers. That being said, it seems as if the government decided to intentionally shoot itself in the mouth…. Bibliography Preliminary Inquiry Into Allegations Regarding Senators Cranston, DeConcini, Glenn, McCain, and Riegle and Lincoln Savings and Loan, hearings before the Senate Select Committee on Ethics, 101st Cong., 2nd Sess., Washington, DC: U.S. Government Printing Office, 1991. Pizzo, Stephen, Fricker, Mary and Paul Muolo. Inside Job: The Looting of America's Savings and Loans, New York: McGraw-Hill Publishing Co., 1989. Garn-St Germain Depository Insitutions Act of 1982. Retrieved: March 2006, from http://www.phil.frb.org/src/Garn.html Financial Institutions Reform, Recovery, and Enforcement Act of 1989 Retrieved: March 2006, from http://thomas.loc.gov/cgi-bin/query/D?c101:5:./temp/~c1012Od0f6:: “The S&L Crisis: A Chrono-Bibliography” Retrieved: March 2006, from http://www.fdic.gov/bank/historical/s&l/ Timothy Curry and Lynn Shibut. “The Cost of the Savings and Loan Crisis: Truth and Consequences” Retrieved: March 2006, from http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf US Department of Justice News Release. “CHARLES KEATING PLEADS GUILTY TO FEDERAL FRAUD CHARGES; FOUR CRIMINAL CONVICTIONS RESOLVE 10-YEAR-OLD CASE” Retrieved: March 2006, from http://web.archive.org/web/20040218161907/http://www.usdoj.gov/usao/cac/pr/072.htm Newsmeat.com. “Charles Keating’s Federal Campaign Contribution Report” Retrieved: March 2006, from http://www.newsmeat.com/ceo_political_donations/Charles_Keating.php --------------------- - BACK TO INDEX - REPLY - QUOTE - EDIT - DELETE -

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