President Obama has pledged to sign misleadingly named legislation that would ‘gut investor protection’
Even beyond the normal American historical amnesia, leaders of both political parties seem to have forgotten how deregulation of the financial markets led to the 2008 financial crisis and the deep recession from which the country is still slowly recovering.
In “a colossal mistake of historic proportions,” in the words of Simon Johnson, the former chief IMF economist now at MIT, last week Congress approved — and President Barack Obama has long made clear he is ready to sign — a bill that Johnson says “would gut investor protection in the United States” under the cloak of creating jobs.
Republicans claimed the misleadingly named JOBS Act (Jumpstart Our Business Startups) would remove regulations that block start-up companies from expanding investment and job creation, without producing credible evidence of such barriers. Even worse, the legislation strips investor protections, disclosure requirements and regulations against investment firms deliberately misleading investors from very big companies as well — up to $1 billion annually in sales.
But the labor movement does not so easily forget the ravages of deregulation. So in the midst of a fast-track congressional action, the AFL-CIO tried to mobilize activists against the legislation.
For at least two reasons, unions have a stake in how the financial markets work. They are interested in protecting investments that provide retirement security for their members and other workers. And they have seen how deregulated financial markets have disastrous effects on workers. They encourage financial speculation and engineering that worsens inequality and often destroys jobs (witness the merger and takeover craze), exploits the vulnerable (witness the predatory lending during the last decade) and creates bubbles (from tech stock bubbles to derivative bubbles) — all at the expense of the real economy and the majority of working people.
The AFL-CIO was not alone in opposing the JOBS Act, which the Senate passed Thursday with a wide bipartisan majority, following similar House action last week. Federal and state securities regulators, pension fund officers, prominent economists and investor protection advocates also weighed in against the legislation.
Beyond the financial and ideological influence of the financial services lobby, Republican political threats to deem a vote against the bill as “anti-jobs” scared most Democrats, who had even less will to fight when their president supported the bill. A few Democrats, such as Sens. Jack Reed (D‑R.I.) and Dick Durbin (D‑Ill.), tried to reform and tighten up the bill.
Experts, ranging from Securities and Exchange Commission chair Mary Schapiro to Jay Ritter, a specialist in initial public offerings at the University of Florida, argued that by increasing the chance of fraud, this legislation threatened the functioning of capital markets and could raise the cost of capital for legitimate small businesses, who already can obtain exemptions from many rules.
A slowdown in IPOs is expected in a still recovering economy, and Ritter testified before Congress that the legislation would not result “in a flood of companies going public…[or] noticeably higher economic growth and job creation.” But Johnson warned readers of his Baseline Scenario blog, “You will be ripped off more,” particulary through opening up a largely unregulated opportunity for “crowd funding” businesses on the internet.
In a very large number of circumstances, businesses and investment banks working for them will be able to circulate all kinds of promotional analyses long before they have to produce the carefully audited and regulated prospectus that the SEC requires now.
Remember how in the tech bubble investment firms pressured their supposedly independent researchers to hype companies that the insiders privately denigrated as dogs? Keeping in mind the farewell column executive director Greg Smith wrote about the exploitative culture of Goldman Sachs, the question is not whether this legislation will contribute to another destructive financial crisis, but when.
David Moberg, a senior editor of In These Times, has been on the staff of the magazine since it began publishing in 1976. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. He has received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy.