The Rebirth of Regulation

Portrait, Robert Reich, 08/16/09. (photo: Perian Flaherty)

hat do oil giant BP, the mining company Massey Energy, and Goldman Sachs have in common? They're all big firms involved in massive plunder. BP's oil spill is already one of the biggest and most damaging in American history. Massey's mine disaster, claiming the lives of 29 miners, is one of the worst in recent history. Goldman's alleged fraud is but a part of the largest financial meltdown in 75 years.

All three of these companies are also publicly-held, which means that much of the financial costs of these failures will be passed on to their shareholders, many of whom are already watching their stock prices plummet. Prominently among those shareholders are pension funds and mutual funds held by people like you and me.

That may seem fair. After all, shareholders benefitted when BP made big profits extracting oil without paying attention to a possible blowout, when Massey Energy got fat earnings from its careless coal mining operations, and when Goldman Sachs did wonderously well for its own stock holders by allegedly defrauding others. In fact, it was pressure from their shareholders seeking the highest possible returns - and their executives, whose pay is linked to the firms' share performance - that led all three companies to cut whatever corners they could cut in pursuit of profits.

But profits aren't everything, which is why we have regulations that are supposed to be enforced. So a key question in each of these instances is: Where were the regulators?

Why didn't the Department of Interior's Minerals Management Service make sure offshore oil rigs have backup systems to prevent blowouts? One clue: You may remember MMS's wild drinking parties exposed during the Bush era.

Where was the Mine Safety and Health Administration before the Upper Big Branch mine exploded? MSHA says it fined the company for a whole string of violations, but the law didn't allow fines high enough to deter the company. Which raises the next question: Given Massey's record, why didn't the Bush-era MSHA seek to change the law and increase the penalties?

Why didn't the Securities and Exchange Commission spot fraud on the Street when it was happening? Well, as we all now know, the Bush SEC was asleep at the wheel.

But don't blame it all on George W. For thirty years, deregulation has been all the rage in Washington. Even where regulations exist, Congress has set such low penalties that disregarding the regulations and risking fines has been treated by firms as a cost of doing business. And for years, enforcement budgets have been slashed, with the result that there are rarely enough inspectors to do the job. The assumption has been markets know best, and when they don't civil lawsuits and government prosecutions will deter wrongdoing.

Wrong.

When shareholders demand the highest returns possible and executive pay is linked to stock performance, many companies will do whatever necessary to squeeze out added profits. And that will spell disaster - giant oil spills, terrible coal-mine disasters, and Wall Street meltdowns - unless the nation has tough regulations backed up by significant penalties, including jail terms for executives found guilty of recklessness, and vigilant enforcement.

After thirty years of deregulation, it's time for the rebirth of regulation: Not heavy-handed and unncessarily costly regulation, but regulation that's up to the task of protecting the public from companies and executives that will do almost anything to make a buck.

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Robert Reich is Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written twelve books, including "The Work of Nations," "Locked in the Cabinet," and his most recent book, "Supercapitalism." His "Marketplace" commentaries can be found on publicradio.com and iTunes.