In the latter part of the 20th century, a wave of deregulation, championed by influential figures such as Ronald Reagan and Alan Greenspan, swept across the United States. This movement, often backed by individuals and groups with substantial financial incentives in the deregulation of financial markets, promised economic growth through a free market with minimal government intervention. Critics, including economists and financial analysts, warned of potential pitfalls, cautioning that deregulation could pave the way for financial instability and fraud. But their warnings fell on deaf ears. As we stand in 2023, we delve into the catastrophic repercussions of these policies, which have left an indelible mark on the American economic landscape.
The United States finds itself grappling with the ghosts of deregulatory policies that have enabled financial disasters amounting to a staggering $12.719 trillion in inflation-adjusted losses. This figure, which is over half of the nation’s current GDP of $22.857 trillion, serves as a grim testament to the devastating impact of deregulation on the economic health of the nation.
The 1980s: The Genesis of Deregulatory Disasters
- Savings and Loan Crisis: The deregulation of the savings and loan industry, encouraged by lobbyists and politicians keen on economic growth, allowed institutions to engage in risky commercial real estate lending. This lack of oversight led to widespread corruption and fraud, resulting in a loss of $316.08 billion, adjusted for inflation. Critics like economist Hyman Minsky had warned against such deregulatory measures, highlighting the potential for financial instability.
- Junk Bond Scandal: The rise of the junk bond market was facilitated by deregulation, with figures like Michael Milken at the helm. Milken, through his firm Drexel Burnham Lambert, championed high-yield “junk” bonds, which eventually led to a speculative bubble and an inflation-adjusted loss of $1.24 billion.
The Early 2000s: The Era of Corporate Malfeasance
- Enron Scandal: The deregulation of the energy market allowed Enron, under the leadership of Kenneth Lay and Jeffrey Skilling, to exploit loopholes, creating complex financial instruments that obscured the company’s true financial health. This scandal, which saw employees losing their life savings invested in company stock, amounted to an inflation-adjusted loss of $16.53 billion.
- WorldCom: Under CEO Bernard Ebbers, WorldCom engaged in accounting fraud, capitalizing on the deregulated environment to inflate assets and mask liabilities, leading to an inflation-adjusted loss of $256.68 billion. The scandal highlighted the dire need for regulatory oversight, a concern raised by numerous analysts over the years.
2008 Financial Crisis: The Pinnacle of Deregulatory Fallout
- Financial Crisis: The repeal of the Glass-Steagall Act, encouraged by the likes of Senator Phil Gramm, allowed banks to engage in risky financial instruments, including subprime mortgages and derivatives, with little oversight. This fostered a financial meltdown that continued unabated for over a year until $12 trillion had been erased from our economy (when adjusted for inflation), affecting millions of average Americans while largely sparing the wealthy.
- Bernie Madoff Scandal: In a loosely regulated sector, Bernie Madoff operated the largest Ponzi scheme in history, exploiting the lack of stringent oversight to defraud investors of $77.76 billion in 2023 dollars. The scandal underscored the warnings of skeptics like Harry Markopolos, who had raised concerns about Madoff’s operations years before the scheme unraveled.
Recent Times: History Repeats Itself
Founded by Elizabeth Holmes in 2003, Theranos promised to revolutionize the healthcare industry with a device that could quickly and cheaply conduct comprehensive tests using only a few drops of blood. However, the company was built on a web of lies and deceit. A lack of oversight and the deregulated financial environment surrounding tech startups allowed Theranos to operate without demonstrating the veracity of its technology. Despite warnings from whistleblowers and journalists, including a groundbreaking article by John Carreyrou in the Wall Street Journal that exposed the company’s fraudulent practices, it took years for the truth to surface. The scandal, which culminated in a series of lawsuits and the closure of Theranos, represents a loss of $9 billion, the company’s valuation at its peak.
The Collapse of FTX
FTX Trading Ltd, once a behemoth in the cryptocurrency exchange landscape, specialized in the buying and selling of crypto derivatives and was at its peak valued at a staggering $40 billion. The firm was founded by Massachusetts Institute of Technology graduates Sam Bankman-Fried and Gary Wang in May 2019. Their backgrounds in ETFs trading and technology (with Wang having worked at Google) propelled the company to great heights, raising $25 billion in valuation by October 2021 through substantial investments, including from a firm owned by the Singaporean government.
However, the firm’s downfall began with a series of alarming events in late 2022. On November 11, 2022, Bankman-Fried resigned as CEO, and shortly after, the company declared bankruptcy, a situation exacerbated by a liquidity crisis. This crisis was triggered by the movement of up to $10 billion of FTX customer funds to Alameda Research Company, primarily held in the FTT token, a crypto asset tied to FTX. The situation worsened when Changpeng “CZ” Zhao, the CEO of cryptocurrency exchange firm Binance, announced the sale of its FTT tokens due to “alarming trends in the balance sheet of companies tied to Bankman-Fried.” This announcement spurred a surge in customer withdrawals, pushing the firm into bankruptcy.
In December 2022, a month after the collapse, Bankman-Fried was arrested facing numerous charges including wire fraud, money laundering, and conspiracy to defraud the United States. The collapse and the subsequent legal battles highlight the severe lack of oversight in the rapidly evolving crypto industry, a sector significantly influenced by deregulatory policies that have often sidelined the necessity for stringent regulatory frameworks to safeguard investor interests.
The Collapse of Silicon Valley Bank
Silicon Valley Bank (SVB), established in 1983, had grown to become America’s 16th largest commercial bank before its sudden collapse in March 2023. The bank was a significant player in the tech sector, providing services to nearly half of all US venture-backed technology and life science companies, with operations extending to several countries globally. Its assets had more than tripled from $71 billion at the end of 2019 to a peak of $220 billion at the end of March 2022, a growth fueled by the tech sector’s explosive rise, ultra-low borrowing costs, and a pandemic-induced boom in demand for digital services.
The collapse ensued over a frenetic 48 hours, initiated by a series of poor investment decisions stretching back several years. The bank had invested heavily in US government bonds during a period of near-zero interest rates. However, the Federal Reserve’s aggressive interest rate hikes to curb inflation eroded the value of SVB’s bond portfolio, leading to substantial losses. The situation escalated when the bank announced the sale of a significant amount of securities at a loss and a plan to sell $22.5 billion in new shares to cover the financial gap, triggering a panic among customers who withdrew their funds massively, fearing a repeat of the global financial crisis a decade and a half ago.
The bank’s stock plummeted 60%, and efforts to raise capital or find a buyer were abandoned. California regulators intervened, shutting down the bank and placing it under the Federal Deposit Insurance Corporation’s receivership, a move that typically entails liquidating the bank’s assets to repay depositors and creditors. This event marked the most significant US bank failure since the 2008 financial crisis, raising serious concerns about the broader banking system’s stability.
The collapses of Theranos, FTX, and SVB underscore the continuing gaps in regulatory oversight, a consequence of deregulatory policies that have often failed to keep pace with the rapid developments and complexities in the financial and tech industries. These events serve as a stark reminder of the potential repercussions of deregulation, highlighting the urgent need for robust regulatory frameworks to safeguard the financial system and protect investor interests.
Hypothetical: What Would a Sudden Loss of $12.719 Trillion do to our economy?
As we grapple with the historical and recent repercussions of deregulation, it is worth pondering the hypothetical yet terrifying scenario of the United States suddenly losing an amount equivalent to the $12.719 trillion lost to financial scandals from its current GDP.
Such a catastrophic event would dwarf any economic downturn the country has previously experienced, including the Great Depression, where the GDP fell by about 30%, and the 2008 financial crisis which saw a GDP contraction of over 4%. This hypothetical scenario would induce a severe economic depression characterized by massive unemployment, bank failures, a stock market crash, and a real estate market collapse. The social fabric of the nation would be strained with increased poverty, a mental health crisis, and a potential rise in crime rates.
The political landscape would not be spared, with potential policy responses ranging from stimulus packages to austerity measures, coupled with political instability and weakened international relations. The long-term consequences would be equally grim, with a slow recovery process, generational impacts, and stifled innovation and development.
This scenario, while hypothetical, serves as a stark warning of the potential consequences of deregulation, illustrating the urgent need for robust regulatory frameworks to prevent such catastrophic economic downturns.
Conclusion: The Urgent Plea for Robust Regulation
It is imperative to learn from history and foster a regulatory environment that prioritizes stability and sustainable growth over short-term gains. The trillion-dollar tale of deregulation serves as a stark reminder of the perils of unchecked corporate freedom, urging us to pave a path grounded in prudence, accountability, and foresight.
The argument against deregulation is not just a theoretical discourse but a plea grounded in hard facts and tragic histories. It is a call to action, urging policymakers to steer the ship away from the iceberg and navigate toward safer waters, where the nation’s wealth is preserved, and the economy is shielded from the devastating impacts of financial scandals that have, thus far, cost us over half of our current GDP. It is high time we say no to deregulation, a policy that has proven to be not just costly but catastrophically expensive.
