Could a new Pecora-style commission swell a tide of new populism? Taking a look back into history, Roosevelt Institute Braintruster Henry C.K. Liu concludes that it could.
Back in the 1930s, the Great Depression that followed the 1929 market crash had direct political repercussions. In the 1930 mid-term elections, the Democrats gained control of Congress, and in 1932 Democratic candidate Franklin D Roosevelt was easily elected president over Republican incumbent Herbert Hoover, carrying over 40 states. The Democrats finally gained control of both Congress and the Executive Branch after more than a decade of Republican rule.
The new Democratic chairman of the Senate Banking and Currency Committee, Senator Duncan U. Fletcher of Florida, immediately dismissed the Republican general counsel of the commission on the 1929 crash. He appointed Ferdinand Pecora, an assistant district attorney for New York. The Pecora Commission investigations after 1930 revealed a host of conflicts of interest in the financial sector in the years leading up to the 1929 crash, such as bank underwriting of unsound securities to save near non-performing bank loans, rampant insider trading and "pool operations" by speculators banding together to move a stock and to close out the pool at a peak price for profit, leaving the manipulated public with subsequent losses.
More shocking still, the Pecora Commission uncovered the embarrassing fact that JP Morgan and his fellow banking titans not only continued to reap huge profit from rescuing firms they helped put in distress while the economy fell into severe depression, but they were also able to avoid paying any income tax in 1931 and 1932 through tax loopholes on paper losses of distressed companies they acquired. These bankers were in fact buying up a country in economic distress on the cheap with their tax deductions.
Revival of populism: the Single Land Tax
The excesses of the Roaring Twenties revived populist calls for reform and even radical demands for revolutionary systems of taxation. The Robert Schalkenbach Foundation (RSF) was organized in 1925 to promote public awareness of the social philosophy and economic reforms advocated by Henry George (1839-1897), centering around the "single tax on land values" first published in The Christian Advocate in 1890. The Henry George Foundation of America was formed in 1926 as a non-profit entity by some of the leading luminaries of the progressive wing of the Democratic Party in Pittsburgh, Pennsylvania. George believed that exclusive private ownership of land (natural resources) created unwarranted special privileges for certain people and felt that keeping land out of production was destructive to the economy. He advocated shifting taxes from labor and capital onto the value of land and natural resources.
Riding on a wave of populism, George ran, though unsuccessfully, twice for mayor of New York, the first time in 1886 when he came in second ahead of a young Theodore Roosevelt. George died in the midst of his second run in 1897, aged 64. Between elections, he traveled the world promoting his vision of economic justice, influencing many reformers. In pre-revolution Russia, George's ideas were popularized by Leo Tolstoy, and in China by Sun Yat Sen, the leader of the revolution that overthrew in 1911 the 267-year-old Qing dynasty. George's grand daughter was the celebrated American choreographer Agnes George de Mille.
The 1920s were a time of revival for 1860s socio-economic Darwinism manifesting itself through laissez-faire market capitalism which condones no-holds-barred competitiveness not just for economic growth but for corporate survival. It denied the early American communal spirit of cooperation. Big business adopted the "survival of the fittest" theme of English sociologist Herbert Spencer and Yale professor William Graham Sumner with self-righteous morality. Yet survival of the fittest among the animal kingdom is practiced only between species, while intra-species cooperation is the general law. The symbiotic interdependence of different species is well recognized in all ecological systems. Moreover, the laissez-faire market system is far from a natural phenomenon, but a contrived mechanism with the purpose of reconciling individual pursuit of self interest with the welfare of society. It was becoming clear that this reconciliation was again failing in the 1920s and it had been in the 1860s.
Reacting against economic individualism, other populist voices included Lester Frank Ward (1841-1913), who asserted that man should use his intelligence to control and direct his future, making a distinction between the "telic" and the "genetic", insisting that there is "no natural harmony between natural law and human advantage". Thus laissez-faire market capitalism does not necessarily promote human progress, and when it runs amuck, could pervert economic progress to reverse human progress in civilization. Ward's views paved the way to positive socio-economic planning by government that the Progressive and the New Dealers promoted.
Populism and new security laws
With a backdrop of such populist ideas, the 1932 hearings and findings of the reconstituted Pecora Commission galvanized broad public support for new securities laws. As a result, Congress passed and Roosevelt signed into law the Security Act of 1933, referred to as the "truth in securities" law, with two basic objectives: 1) require that investors receive financial and other significant information concerning securities being offered for public sale; and 2) prohibit deceit, misrepresentations, and other fraud in the sale of securities.
Congress also passed in 1933 the Glass-Steagall Act, which mandated a separation of commercial banks that took deposits and extended loans, from investment banks that underwrote, issued, and distributed stocks, bonds and other securities. The House of Morgan had to split into JP Morgan Bank, a commercial bank, and Morgan Stanley, an investment bank to satisfy Glass-Steagall, even though both were still controlled by Morgan.
The next year, Congress passed the new Security Exchange Act of 1934, creating the Securities and Exchange Commission (SEC) to protect the interests of the small investor. The act empowers the SEC with broad authority over all aspects of the securities industry, including the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs). The various stock exchanges, such as the New York Stock Exchange, American Stock Exchange and National Association of Securities Dealers which operates the NASDAQ system are SROs.
President Roosevelt appointed Joseph P. Kennedy as first SEC chairman. Kennedy was a highly successful speculator on Wall Street with a wide network of business dealings, some of which were questionable, whose appointment Newsweek described as "a former speculator and pool operator will now curb speculation and prohibit pools".
Unlike other run-of-the-mill speculators, Kennedy had farsighted political vision, which he realized by the shrewd use of his considerable wealth gained from market tactics that he was now responsible for policing. In his first speech as SEC chairman, Kennedy pronounced a new populist path for the stock market: "The New Deal in finance will be found to be a better deal for all." Kennedy's populism paved the way for his son, John F Kennedy, to the White House three decades later in 1961.
Clinton's rejection of the Jackson/FDR/Kennedy tradition
Ironically, another Democratic president, Clinton, elected on a populist platform in 1992 another three decades later, repealed in 1999 the Glass-Steagall Act that had created the SEC. On November 12, 1999, Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act which repealed the Glass-Steagall Act. This allowed commercial and investment banks to re-consolidate. The repeal of the Glass-Steagall Act, by combining the conflicting roles of lending institutions and security issuing institutions, facilitated the development of structured finance and debt securitization that contributed structurally to the 2007 credit crisis.
Phil Gramm, who began his political career as a Democratic congressman in the Texas populist tradition, changed party affiliation to become a neo-liberal Republican senator from Texas. As Republican chairman and ranking member of the Senate Banking Committee, he spearheaded the Gramm-Leach-Bailey Act of 1999 with the conviction that higher bank profits commensurate with higher risk were the salvation of the economy, reversing the age-old principle that banks should be the economy's most risk-averse institution.
Between 1995 and 2000, Gramm received more than $1 million in campaign contribution from the securities and investment industry, more than he received from oil and gas interests that traditionally were a key source of financial energy in Texas politics. After retiring from politics, Gramm became vice-chairman of the investment banking arm of Union Bank of Switzerland (UBS), an institution at present in the spotlight for massive losses from subprime mortgage exposure. Gramm has was also an economic adviser to the presidential campaign of Republican candidate John McCain.
Gramm became linked to the Enron scandal when it came to light that his wife, Wendy, while serving on the Commodity Futures Trading Commission, was involved in granting an exemption for Enron from federal oversight, immediately after which she was named a director at Enron. It came to light later that Gramm had helped to turn the regulatory exemption into law as well as push through the deregulation of energy markets that led to the Enron scandal. During this period, Enron was a major contributor to Gramm's political campaigns.
The New Pecora-style commission and the rising tide of New Populism
If the new Pecora-type commission is anything like the original one, it would return to the original mandate of the SEC, which was to protect small investors who were not professional enough to survive on caviat emptor. Remember, FDR appointed Joseph Kennedy as first Chairman of the SEC. The issue of the new commission is not merely a matter of appointing members of correct political affiliation, but whether the prosposed commission reflects the rising New Populism that is sweeping across the entire nation. This rising tide is partly what got Obama elected -- he himself ran as a populist (as did Congressman Ron Paul and Gov. Mike Huckabee). Since the election, continuing comparisons between Obama and FDR, as well as ongoing media references to the New Deal, are evidence of the trend towards populism. And the financial crisis, of course, has turned a lot of moderates into populists. Whether the New Populism will actually take root is another matter, but the commission would be wise not to ignore the hunger among ordinary people to hold the elites accountable.