Caveat - this will be a long one.  That is partly payback for all those days and nights spent studying the economics of public regulation. It seemed dry at the time.  But after 900 points of Dow freefall, a little re-education may not be a bad thing.  So with my hat doffed to Professor William Shipman (now long gone), I sally forth into the land of economics again.

For starters...

Here is some "required reading", if you want to see what John McCain used to think about regulation, and if you want to appreciate how his tune has changed in the last day or so.  In other words, it is a colossal flip flop, the action of a chameleon, trying to blend in with its new surroundings.  The only trouble is that the chameleon's appearance is only skin deep.  You cannot know what lies below.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/16/AR2008091603732.html?nav=rss_print

So what about this ugly word regulation?  Who wants to be regulated?

The problem is that, like spinach, some of these regulations are actually good for us.  Let's take a few common examples.

The speed limit.  Yeah, it is cool to do 120 mph on the interstate (and in Europe that can happen). But the public safety is assured by having all of us conform to a lower speed limit.  And energy is saved. And so are lives.  Are you aware of the monster accidents that occur on the high speed autobahns from time to time, with many cars piling into each other around a bend, or on rain slick roads, or in the fog? For the public good, we regulate speed on the highway. And nobody yaps much about the evil bureaucrats who set 65 mph or that infamous 88 kph when we tried to go metric. Yes, now that was an example of idiotic regulation, but you have to hand it to the bureaucrats.  At least they got their math right.

The altitude rules, separating airplanes in flight. Maintenance requirements to make sure aircraft are safe.  Oh by the way, have you noticed how the airline industry on time performance has deteriorated over the past 10 years?  Ever wonder why?  Because the FAA relaxed the rules on airport landings, gate allocations and price competition, that's why!  So now we have airports overcrowded beyond capacity a 8am and 7pm, with hours of delays...mostly due to deregulation.  Think of all the jet fuel which is being wasted (and WHO OR WHAT benefits from that? You have two guesses and the airline industry is not one of them). And then came 9/11 with fantastic regulation of people access in and around airports.  Anybody have a problem with THOSE kinds of rules?  The public good certainly benefits from strong transportation regulation.

Food safety.  We don't hear about 6000 kids getting sick from milk in this country, right?  And we like those labels on our food products, it helps to know which chemicals make things taste so good.

Smoking.  I mean of the fire safety variety.  Flammables have to be marked.  Fire extinguishers need to be in public buildings. Hydrants and fire departments exist (we don't rely on bucket brigades any more).  Asbestos - a fire retardant - is now being taken out of our buildings.  And that did not happen by the function of Adam Smith's invisible hand.  It took government to recognize a public health hazard and do something about it.

Roads.  Their width, their paving, their markings - all help us to get about safely.  There was a time in our country when railroads all had different gauges (spacing between wheels).  An eastern train could not run on western tracks.  It took regulation to fix that wagon so that we could travel coast to coast and not rely on the Pony Express (romantic as it was).

The economic theory behind regulation has to do with the existence of a public good.  There are things which people enjoy in public, such as a road between towns, or electricity produced and distributed. Public goods are characterized by commonality, with their benefits are spread across many.  Single people or families rarely build roads and schools.  Communities need schools and so we regulate education with the creation of a 12-grade system and typical academic year.  We may not do a perfect job of it, but the days of log cabin home schooling seem to be a thing of the past.  For most of us, that is, unless we live in Alaska and can see Russia from the living room window.

Money is also a public good.  It was not always that way.  Until the creation of the Federal Reserve (which is actually a consortium of regional central banks and does not function as the US Treasury, since we have always feared the undue influence of a truly central bank), the United States functioned with multiple currencies.  Our greenback is another regulation that we barely recognize, in the sense that there is only one legal tender here in the United States and we do not trade in private bank notes.

The US dollar came into being in the middle of the Civil War, because there were so many private currencies in circulation.  The Union Army was having trouble paying for supplies and trade was being interrupted and impeded by arguments over the value of currency.  Imagine hundreds of exchange rates changing daily between notes printed by banks in Philadelphia and those from Ohio, New York, Kansas or California. It was bedlam and so Lincoln took action to solve the problem (and remember that he was a Republican).

In 1914, on the eve of American involvement in the First World War, the Federal Reserve Note (which is what circulates today) came into being.   Actually in the period from 1914 to 1971, there were two legal tenders, the original greenback (United States Note) and the Federal Reserve equivalent.  Plus that rare currency, the US Silver Certificate.  But I digress.  The point is that our money system has been well regulated for 150 years.Or at least it was, until Ronald Reagan came along.

With Alan Greenspan at the helm of the Fed, Reagan ushered in a 20 year reign of deregulation of the financial industry.  It culminated in 1999 with the historic removal on restrictions of the interactions between commercial banks (the ones that hold our mortgages) and investment banks (the ones that finance industry from Wall Street - to make a gross oversimplification).  That change repealed provisions of the Glass-Steagall Act of 1933, the same law that (among other things) established the FDIC.  The division between banks had been put in place in 1933, in response to guess what - the excesses of the banking industry that allowed our last great depression freefall.

So, from Reagan, though Bush41, Clinton, and Bush43, we have had a stage set.  Can there be any doubt left now that de-regulation (or an excess of relaxed regulation) has contributed to our present quagmire?  

A friend today blamed Clinton for this mess; but Google his economic team (Robert Reich, Lawrence Summers and Laura Tyson) and you will find a bunch of activist believers in government intervention. Two flies in Clinton's ointment were of course, the independent head the Fed, Alan Greenspan, and a Republican congress which obstructed the Clinton agenda. Obstructed is a generous word. 

The law which repealed Glass-Steagall was the Gramm-Leach-Bliley Act of 1999.  GLBA was pushed through by Senator Phil Gramm (R-TX), the chair of the Senate Banking Committee, Rep James Leach (R-IA) and Rep Tom Bliley (R-VA), the chair of the House Commerce Committee.  GLBA was approved strictly along party lines, with a veto-proof majority so that Clinton had no choice but to sign it into law.  And who has been John McCain's politico-economic guru?  None other than Senator Phil Gramm. 

In retrospect, we can look back on the period from 1992 - 2000 as one in which our country prospered.  The economy did not come apart at the seams.  Seeds were clearly sewn for future disaster by a neocon pro-business Republican ideology hell-bent on reversing the laws which had served so well since the 30s. 

We ought not to be shocked when John McCain talks about "a casino on Wall Street".  It is an easy scapegoat.  But what he conveniently disregards is the fact that the gaming industry is WELL REGULATED and that it was the Republicans who removed the safeguards which protected our financial markets.   They left the bankvault open, and the thieves have ripped us all off.  It is what thieves do.  But all John McCain can do now is cluck over those nasty thieves, as if words are enough to change their character.  He cannot see that the bank guards were let go, and the doors left open, by Phil Gramm and so many other Red Party tycoons.  Unbridled business, after all, is good for America.  Right?

Moral of this story. John McCain has gone along with de-regulation for his entire political career.  Let's not allow two days of flip flopping to confuse the issue.  McCain just doesn't have a clue.  But he needn't worry.  He can sell a couple of those mansions at fire-sale prices and still be able to live like a well-heeled US Senator.  Cindy has him covered.

Discuss