“The markets innovate, and the SEC should not be in the business of telling them to stand still,” remarked the new SEC Chair earlier this year.
The Securities and Exchange Commission has pledged to fast-track Donald Trump’s grand plan to let the financial markets “breathe” again. In other words, to loosen every strap, keeping the economy from choking itself. It’s embracing a new laissez-faire stance, which is French for ‘don’t call us when it explodes’.
Already, the current SEC Chair has tossed out 14 rules proposed by his predecessor, dropped investigations into crypto platforms, and killed a rule that would’ve required investors to disclose massive, risky derivative bets, the same kind that blew up the global economy in 2008. The SEC is also proposing to relax rules for public companies because, the thinking goes, you can trust corporate America to self-regulate.
Deregulating Wall Street is akin to deregulating traffic. In this brave new marketplace, there are no stoplights, lane markings, or speed limits. The road belongs to tanks of speculative capital and hot rods of crypto cowboys. Regular drivers (be they workers, savers or small investors) can try their luck in the slow lane or just accept that the guardrails are purely decorative.
If this sounds crazy, it is not! In fact, America has been deregulating itself from one crisis to another.
In 1978, the Supreme Court’s Marquette vs First of Omaha ruling let banks export their home-state interest rates nationwide, kicking off an intense race to the bottom. By the 1980s, the Congress joined the fun with the Depository Institutions Deregulation and Monetary Control Act, which raised deposit insurance and phased out interest rate caps, a move that led to the savings and loan crisis.
But we didn’t stop there; we innovated. The 1982 Garn-St. Germain Depository Institutions Act told thrifts they could behave like banks; the Alternative Mortgage Transaction Parity Act let lenders design mortgages leading to adjustable rate mortgages, balloon clauses, and negative amortization loans; and the 1985 Secondary Mortgage Market Enhancement Act opened the door to private mortgage securities, the building blocks of the 2008 subprime dynamite.
By the 1990s, deregulation had gone bipartisan. The Bill Clinton administration repealed the Glass-Steagall Act, the firewall separating your grandmother’s savings from Goldman Sachs’ roulette table. Then came the Commodity Futures Modernization Act of 2000, which removed “a legal constraint on derivatives speculation that dated back not just decades but centuries” because, really, what harm could unregulated side bets on global debt possibly do? Cue the 2008 financial crisis, a meltdown so massive we briefly pretended to learn from it. We didn’t.
Now, the SEC is once again embracing light-touch regulation. The growth of financing activity outside of the traditional banking sector is adding risk to the financial system. Banks in the US and Europe have $4.5 trillion of exposures to hedge funds, private credit groups and other non-bank financial institutions, accounting for around 9% of total loan books. Crypto is getting a free pass. Corporate disclosure rules are melted down for parts.
This isn’t reform. It’s nostalgia for an era when every loophole was an opportunity and every bailout a business model.
FDR knew better. After the Great Depression, he put “a cop on Wall Street,” because he figured something timeless: when the market polices itself, it doesn’t call 911; it buries the evidence.
The SEC was never perfect. But it was a warning sign, a flashing light that said someone was watching. Now, those lights are being turned off, one after the other.
Krishnan Ranganathan is an investment banker and an alumnus of Harvard Business School