Report From the White House: Why Didn't Enforcement Work?

We're not shy about advocating for shareholder rights, or making sure our members are heard on important matters that affect all of our portfolios. That's why the White House asked for feedback from the Motley Fool community and agreed to answer your questions. Here is the second part of our interview with one of President Obama's chief economists.

On Tuesday, The Motley Fool sat down with Austan Goolsbee, Colbert Report survivor and chief economist for the President's Economic Recovery Advisory Board, to ask your questions about the White House's financial regulatory reform plan.

One hot topic you raised was the potential for increased regulation to squelch the machinations of capitalism. Goolsbee addressed that, as well as the high points of the administration's recommendations for financial-industry reform, in the first part of David Gardner's and my interview, posted yesterday.

Where were the watchdogs when we needed them?
Another common theme that came out of Fool member comments was lackluster enforcement:

  • From dancinglight: "There are already a number of laws in place that were ignored or conveniently dismissed by the government itself. How about the feds just enforcing what is already there?"
  • Afthought wrote: "Greater regulation is not the answer. Enforcement of existing regulations through prosecution and imprisonment of violators would bring a higher degree of honesty to the financial world."
  • And this comment, posted by gamala: "I agree with the Obama plan for the new, comprehensive agency. However, any agency is only as effective as the monitoring and accountability that is placed in its authority. There must be consequences for breaking the rules and they must be harsh so that others do not break rules. That includes consequences for the financial institutions and consequences for any corrupt practices attributed to the oversight agency employees."

In the following segment, we ask a question posted by Fool member sfun about the breakdown in investor protection. You'll also hear Goolsbee's thoughts on the conflicts of interest on Wall Street that still exist, and how the government failed the individual investor.

 

Keep those questions and comments coming
As individual investors, we all have a material interest in how President Obama's new rules of the road will affect our portfolios, the financial products and services we use, and the companies in which we invest.

Let's keep this conversation with the administration going: Enter your comments below about financial-regulation enforcement -- or any other thoughts about financial-regulation reform.

Monday on Fool.com, we'll share what the White House thinks about bringing back the Glass-Steagall Act.

Dayana Yochim thinks that "watchdog" is too wimpy of a term. She thinks the suits on Wall Street would be more likely to color within the lines if Washington threatened to send "The Crusher" to set things right. The Motley Fool is investors writing for investors, and it's even representing investors whenever we're invited to the White House.


Read/Post Comments (24) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 16, 2009, at 6:13 PM, WyattJunker wrote:

    Christopher Cox was derelict in his role. Cramer always talks about the abolition of the uptick rule prior to this catastrophe. He's right. He's also right about what kind of havoc the SKF did to banks once traders realized they could beat them down, turning their stock into pennies, which in turn caused a death spiral and further panic.

    The only thing that kept us from 1929 and bank runs was the FDIC.

    We need a real SEC who can enforce what laws already exist or once did exist. We can't keep having our Bernie Madoffs and our Jeffrey Skillings ruining investor confidence. We need a pro-active SEC who takes a leadership role and gives us back investor confidence, both domestic confidence and foreigners who invest here.

    Where's the SEC? Where were they when 401Ks were getting drained? Where were they in the 90s? Where are they now?

    If we're going to have these agencies already, why add to the problem? Take the agencies you have and beef them up. We don't need a super-regulator.

    We also need to get the government out of where it doesn't belong. Fannie and Freddie are hazardous to the market's health. Political involvement with unions and campaign cash from private companies that go to ensure payback/payola in DC are also destroying our credibility. Its sickening.

    Free markets ARE the answer, not the problem. DC needs to hear that and back up and sit down. Also, if any law is passed related to regulatory reform, kill 5 old laws. We have no sunset legislation, therefore government only insidiously grows larger and larger, and with it higher taxes and increased bullying.

    We need a reduction in the size of government. It is cannibalizing our country from the inside out.

    You want to stop unemployment? Reduce unemployment benefits from a(in some cases) ridiculous two years to what it was when I was younger; 3 months. Then, like Reagan, cut taxes and spending at the same time. Quit printing money. And encourage creative innovation and risk taking. That can only happen when the government gets out of the way. As long as government wants to bathe in the spotlight, unemployment will remain high. Book it! But if they can be humble and understand they don't create earnings, only the private sector does, then they can set the stage for growth again and as a result, jobs.

    This government is the most arrogant I've ever seen and its making things worse, not better.

  • Report this Comment On October 16, 2009, at 6:19 PM, WyattJunker wrote:

    As far as jobs go, unemployment could have been annihilated if that last 900 billion dollar 'stimulus' boondoggle by Pelosi/Reid and their new puppet had any real long term infrastructure plays, not just one time junk bills.

    But if it had natural gas build-outs, nuclear power plant site production ramp ups and offshore drilling in the hopper, we'd be at 6.5% unemployment by now.

    My God, we have to look at China now to see how capitalism really works. They understand. Create jobs. Create jobs. Create jobs.

    All we have here are political jockeys and gimmicks.

    Sad to see such a once great country not know how it got to be so great anymore.

  • Report this Comment On October 16, 2009, at 6:40 PM, bmialone wrote:

    "...like Reagan, cut taxes and spending at the same time?"

    Reagan didn't do that! He was the first president to run up so much debt that the United States moved to debtor nation status for the first time!

    These problems took off with Reagan! Ronald Reagan launched the destruction of unions (which existed, btw, Because of government involvement in the early 1900s, forced to because of the abuses of private companies against their employees). He launched the "government is bad" drumbeat we've been marching to as our consumer protections have gone down the drain. He entrenched, grew, and made official the nation's War on Drugs that has led to our imprisoning more of our citizens than any other nation and has bled us of many billions of dollars. He launched the beginnings of U.S. manufacturing moving overseas with no financial consequences to slow them down, all for more profit because profit is King before all other values. He made up stories about welfare queens and unemployment cheats, exaggerating their numbers and cost to the federal budget, so we would be distracted hating our neighbors instead of the predators after our pocketbooks. He cut taxes as he raised spending and ran up more federal debt than all previous presidents combined! The death knell of the middle class was rung loud and clear by the Reagan administration, and it was the era the "greed is good" slogan was found amusing and taken to heart by Wall Street.

    Only Geroge W. Bush has been more destructive to our economy and our people in my 50+ years!

  • Report this Comment On October 16, 2009, at 6:57 PM, bmialone wrote:

    What happened to enforcement is the Bush administration placed directors in charge of our agencies whose jobs were to sabotage them, and they were starved of dollars to pay for oversight and enforcement.

    It isn't a coincidence that this all exploded after Geroge W's eight years were drawing to a close. The Reagan years and those that followed, with the steady eating away of our civil rights over hysteria causes like drugs and saving lives, and the steady loss of our jobs and consumer protections, we were prime for the Cheney-Wolfawitz duo and their puppet to launch their brazen dismantling of our federal and state protections and the starving and crippling of our consumer protection agencies. Their very first move was to hold energy public policy meetings in secret and never did, even under Congressional order, reveal the players. That was for PUBLIC policy!

    One would be hard pressed to name one single agency, from military intelligence to the environment to the US Postal Service, and all the other agencies and programs, that is still working well anymore despite their all having done so for many years before.

    Starve and corrupt government agencies (OUR government agencies, the people's government) and then accusingly point to them as use them as example of how incompetent government is. Sadly for us, it's worked.

    Oh, and Fannie Mae and Freddy Mac were not the problem. The problem was that when the Democrats tried to prevent changes that would allow those programs to join in on giving loans to those who weren't really qualified, the Republicans, who had the power then, blocked their efforts because they did not want any hindrances to their cronies and specific industries making more profits, even at the expense of the economy and the rest of us. Until that happened, those programs worked just fine.

    Yet, once again, a lie said often enough becomes the truth for so many people. That sad fact hurts all of us.

  • Report this Comment On October 16, 2009, at 7:46 PM, thisislabor wrote:

    Enforcement didn't work because people want to be seen favorably instead of doing what they should and telling the truth even if it is to their detrement in the end.

  • Report this Comment On October 16, 2009, at 8:11 PM, glenby52 wrote:

    @bmialone

    Excellent satire! I kept waiting for the punch line for the entire post.

  • Report this Comment On October 16, 2009, at 8:11 PM, xetn wrote:

    It is so sad to read the previous comments and realize that none of them is based on sound economics. The comments are all based on what they believe to be true and/or politically correct.

    Why not get a basic economics education by reading:

    Henry Hazlitt's: Economics in One Lesson which is available for free online. Just google.

    If we indeed had free-market capitalism, we would not have the current mess. We have a monetary system, controlled by the Fed and its fractional-reserve banking system that creates money out of thin air and forces interest rates at sub-market rates.

    We have over 77000 pages of existing government regulation on virtually every aspect of private enterprise and company expense which is driving up costs beyond belief.

    We have minimum wage laws which prevent the poor and uneducated from gaining jobs because their knowledge and skills will not support the wage in productivity.

    We have constant assault on business in the form of taxes and fees and union wage rates and benefits that results in massive export of jobs to the point where the US is no longer interested in domestic manufacturing. We have become nothing but a services based economy. And the government is intent to kill this sector as well.

    The funny thing is that the only growth industry in the US is government. So, after Obama nationalized the banking, insurance, and auto markets, we are becoming the new old USSR.

  • Report this Comment On October 17, 2009, at 3:00 AM, WyattJunker wrote:

    heh heh heh

    Looks like bmialone skipped right over 1979! And if he wants a repeat of that debacle, he may just get it in Jimmy Carter Part Two who now goes by the name of Obama.

    Passive, estrogen-based foreign policy. A total lack of energy independence. And, my favorite and soon to come, lethal inflation.

    This recent flight of Icarus DOW is about to touch the sun.

  • Report this Comment On October 17, 2009, at 10:40 AM, mountain8 wrote:

    Glass-Steagall Act. YES!

  • Report this Comment On October 17, 2009, at 5:48 PM, wiseclack wrote:

    I second the comments of gamala. Tell those in DeeCee that we are begging for help that really works.

  • Report this Comment On October 18, 2009, at 9:20 AM, 3gberserker wrote:

    The Fool Watch Daily is such a valuable tool.

    Written by the TMF staff, I have always been surprised that so few members are receiving/recommending these updates.

    It would really unite the fool community (of each subscription new letter), if they were keeping up with current events by these communications.

    The boards are great for specialized conversations on stock picks, but the Fool Watch Daily has more potential. I'm so glad they are involved.

    It's never too late to do the right thing.

  • Report this Comment On October 18, 2009, at 12:32 PM, richvermil wrote:

    I generally agree with Wyattjunker's comments. The problem is regulators at the SEC make a tiny fraction of the salary of the people they are regulaating. They are more interested in creating a climate in which they too can make big bucks when they leave the government job and go to work with the big boys. They need to cultivate favor with the sharks rather than do their job in protecting the systrem from manipulation. The enforcers who fall down on the job need to be sanctioned, fired and all of them should be banned from working in the private sector investing world for a period of time.after their government job. This means you will have to pay them in proportion to their resposibility which will be a great deal more than a congressman's salary

  • Report this Comment On October 18, 2009, at 10:38 PM, thisislabor wrote:

    Well, Mr. Goolsbee, I take it back.

    Perhaps it is the system that is broken, not just the people in it.

    I like where the conversation is going though, similar standards across the whole board across all agencies.

  • Report this Comment On October 18, 2009, at 11:03 PM, thisislabor wrote:

    I guess that is called ethics, at least he acknowledged the point, that no rules are going to work if people can side step them and go through other agencies.

    I didn't say that it was people abandoning enforcement, damn it. I said the people in there are crooks. Strait up crooks.

    Alot of financial professionals sell products that they KNOW are not going to return even the equity back let alone a long term interest on their product.

    That is called ethics. Or, a lack there-of.

    Crap, I can't remember the name of the little agency that follows just financial professionals that investigates them. It's not the SEC that's for companies and stocks. It's the one for professionals selling it. THAT company doesn't follow up or enforce the rules that it is suppose too.

    I know, we have reported financial advisors to them and they don't follow up on these people. They don't take away their liscenses.

    Send them to jail. Take their liscenses away - PERMANENTLY. Let the business that supported these people fail. Don't allow these people to start another financial services business again.

    also, if your an investor and your financial advisor has been with 8 different companies in the last 20 years. FIND A NEW advisor. duh!

    greater transparency for what you specifically mentioned Mr. Goolsbee ain't going do jack didly if there isn't someone around to double check that the flyers and pamphelts and marketing propaganda that they sell actually is abiding by those rules.

    And do you Mr. Goolsbee think we should consider devoting our resources back to those agencies that enforce those rules or not? Especially, across those multiple institutions?

  • Report this Comment On October 18, 2009, at 11:07 PM, thisislabor wrote:

    No, I get it, we should make one great big agency to follow all these products, from credit markets to stock markets. so that away one big agency can't figure out what it's suppose to do with too many different jobs and not a big enough budget.

    the system is fine, mostly. except for maybe housing. it is amazing to me people can buy a house w/o a 20% down payment though. I just don't get it why we are subsidizing their risk and not receiving any of the profit though, but that is whole 'nother subject.

  • Report this Comment On October 18, 2009, at 11:35 PM, thisislabor wrote:

    as far as stocks go most people that are going to have any real money in the stock market are going to want to go through some sort of an advisor anyways. your 401k just aint going to get you all the way to retirement.

    from what I can tell most people that spend any real money to buy investments from bonds to stocks, go through advisors. these people buy things from shares in reits to partnerships to annuity contracts etc.

    but they have stopped doing that as they've gotten older because they have been screwed over by some advisor in the past that was out-n-out frauding them. not just selling them a risky asset, but frauding them.

    most these kind of people don't seem to have an accounting//finance degree to look through a form 10K on their own. they have business degrees and full time jobs/or small businesses to own.

    they trust their advisors. for better or for worse.

    also, yes some of the problem may be with the assets themselves that they are selling.

    there may not be full transparency in the accounting books that they are reporting as a form 10k. perhaps. but even still a person can usually tell an easy win from a bad win pretty readily if they are smart enough to read the form 10K.

    however, yes, I think the SEC itself is underfunded too.

  • Report this Comment On October 19, 2009, at 12:06 AM, thisislabor wrote:

    oh that's right we were talking about the banking institutions themselves. yeah no. no solution there for us to do. other than let them fail?

  • Report this Comment On October 19, 2009, at 9:06 AM, Longball111 wrote:

    We're expecting legislators who receive campaign contributions from the financial industry to enact meaningful new regulation? Check out health care reform to get an idea how well this works. The process is corrupt.

    Enforcement of existing laws and regulations would be a nice change. I would do my morale a lot of good to see some arrogant suits do the perp walk. I'm not holding my breath, though.

  • Report this Comment On October 19, 2009, at 10:39 AM, thisislabor wrote:

    Speaking of the rating agencies, is it a mandatory requirement that their bond gets rated? or is it a voluntary requirement?

    I don't know honestly, not off the top my head. But, I would guess it is effecitvely a mandatory requirement that they do, otherwise investors wont buy these kinds of bonds.

    Perhaps, we need more rating companies besides just moodys? a little more market competition there. If they don't like the price charged at one place, they can go to another.

    ....

    I guess he does have a point about at least informing the purchasing investor that both the rating agency and the advisors are one in the same.

    But, I'm not so sure I agree with him stating that it is deeply unsettling. At least I know if they are purchasing advising to make these ratings then they are at least seeking advising, period.

    Perhaps, not allowing it to be the same company that advises and rates is a good idea. I could see a conflict of interest there, sort of like getting your books audited and seeking counsel from the auditors too.

    ...

    My problem I see with it though is that if you have an option or away around the system, you will take it every time because it is more profitable. No, sometimes you have to do things the hard way because they add more long term value in the end. No matter how you change regulation, if the people who are still being regulated want to go around the laws, they will find a way. Every single time.

  • Report this Comment On October 23, 2009, at 12:51 PM, Luoyu wrote:

    How in the heck can you short a stock you don't even own??? I was having trouble wrapping my brain around this article and still pondering. It sure does lead me to the conclusion we need more regulation...

    http://www.rollingstone.com/politics/story/30481512/wall_str...

  • Report this Comment On October 23, 2009, at 2:45 PM, toshinobe wrote:

    I know more about the processes of A/E design, construction, contracts, rules/regulation, greed, and dispute resolution than this enduring economic system problem we have undergone for ages. This is not new phenomenon. But the underlining fact is that in both systems we need to have a system of handling misbehaviors in both economic and construction system alike. This is not talked about much because we don't want to face the reality of shame. I sense today the society tolerates bad acts as good experience rather than paying the dues for its damage it does to others. We MUST have a justice system in place where those who go outside the regulation do pay the price so that our system of fairness doctrine in our democratic society can be shown to be alive and well. We need to stop accepting the idea that crime is not punishable in our society.

  • Report this Comment On October 23, 2009, at 5:51 PM, farrockgrad wrote:

    Goolsbee spoke of the conflict of interest between the rating agencies and the companies they are advising. How about the fact that "independent" board members of corporations are friends of one another and on each other's boards so that they merely serve as 'puppets" for what the CEO and key executives want to do. We need to implement a system wehre independent board members are just that--independent and there to serve the interest of shareholders not corporate execs.

    Steve

  • Report this Comment On October 24, 2009, at 5:24 AM, TopAustrianFool wrote:

    Motley Fool should stay away from politics. This is a conflict of interests. MF is becoming another lobyist.

  • Report this Comment On October 24, 2009, at 7:54 AM, dcwireman wrote:

    KISS!! KISS!! KISS!! Keep it simple stupid. More regulation will just make matters worse. Simplification might be a better way. Define stealing and truthfulness and the penalties for infractions making the penalties really stiff. Define stealing as taking anything that does not belong to you without permission. Lying is not telling the truth all of the time, the whole truth and nothing but the truth. Rules and regulations are good, but most just allow stealing and lying to be lawful because the rules are focused on a particular activity or group of people and not all of the people all of the time regardless of the activity involved. I suppose what I am saying is I believe the core valves of not stealing and truthfulness cannot be regulated and people who do not have these valves will not be regulated. So the rest of us just pay. If financial dealings were covered by the umbrella of no theft and truthfulness as defined above we probably would not be in the mess we are in or have suffered some of the messes of the past. Personnally I do not look to the Federal government for honesty and truthfulness or any government for that matter. So I say in closing fool on! The next 10 bagger is on the horizon whatever the regulations turn out to be.

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