To Regulate or Not to Regulate?
REGULATE, FOOS!!
It can’t be undone now, but choosing to tackle a resource-demanding issue like healthcare reform in the midst of such a severe economic downturn was just stupid. Helloo? Obama? Pelosi? Agggh, stupid. I’d love to see meaningful, substantive healthcare reform, and especially A PUBLIC OPTION, but it just wasn’t going to go well when there were so many other issues that should’ve taken precedence. How about focusing on a decisive Gitmo solution and probably even torture prosecutions? How about a massive environmental policy turnaround to correct for the Bush years? And the biggest: re-establishing a foundation for an economy that doesn’t list like a drunken sailor every 5-10 years. I am not surprised AT ALL that Brown won in Massachusetts. The Dems have lost focus almost as bad as the Republicans.
The issue that should’ve been first and foremost on the agenda is working to see that the economy remains on solid ground. I’ve written before that we need a sustainable economy. Briefly defined, we need to account for external costs to the environment, move away from measuring success in the form of a gross national product, and establish a stable, sound economy that is not dependent on continuous, unending, unsustainable, resource-depleting, materialistic, consumer-based GROWTH rather than an economy that is balanced in an equilibrium with brief periods of expansion and contraction. (And, yeah, easier said than done. But at a minimum, can we get some accountability from the Fed?!?!?! Cause I’m just not so sure that their goals still reflect the goals of a democracy!)
This is even more relevant today. In a horrible case of life imitating the Onion, we have analysts saying that we may ALREADY be in the next bubble. By taking responsibility for so much bad debt, the US government has eaten the ugly bubble and is now looking like the stink spirit in a Miyazaki film. Result? A populace that sees our government as an over-reaching bloated hogstorm of irresponsibility with deep ties to the ultra-wealthy and little concern for holding fast to the ideals of our democracy. Both parties have sold out hard. Neither one of them is worth the price of socks. All the posturing about Libertarian ideals and the smothering evils of regulation — pshah!
Do we need to increase regulation of the finance industry? YOU BET YOUR ASS WE DO!!! And don’t let any smooth-talking faux Libertarian tell you otherwise. Alan Greenspan relied on the all-knowing invisible hand and just let it keep shaping more exotic financial “instruments,” which is code for “wrapped-up in 27 layers of legalese and fancy bows when we know damn well that there’s nothing in here but bait-and-switch crap.” I’ve read lots of nay-saying about regulation from free-market fools who claim that regulation will strangle financial “innovation.” Helllllooooo??? We don’t need innovation in finance! We need stability and integrity!! If you want innovation go invent a REAL PRODUCT!!
Right. So. Because smarter people than me say everything better, here is a link to an article that you must read: How Supposed Free-Market Theorists Destroyed Free-Market Theory. An excerpt:
The greatest lesson from the crisis that we haven’t yet learned is that “industry interests” and “free-market interests” are not the same. In fact, they are more like oil and water, as the industry profits most in the absence of true market competition. And so it should be no surprise that Wall Street has devoted itself to making contracts indecipherable, building boundless negotiating leverage and fighting for favorable breaks and regulation at every turn. What should be a surprise is that the same scoundrels that killed our markets (and also, mind you, wrecked the global economy and demanded taxpayer bailouts) have so ably sold themselves as natural heirs to von Hayek and Friedman — and that so many of us have let them.
Stay on it. Let your Congresspeople know that you care, and that you vote. (You do vote, right?) In an earlier post I explained that we have a “friend” who was a NY investment broker. He laughed as he explained his job to my husband two years ago, “I bundle up shit mortgages and resell them as prime investments to other banks.” Ha, ha! That’s pretty funny! He still has a house in the Hamptons. A second house. The first one is in a tony area of Manhattan. Some of my hard-working friends are struggling with no jobs and the threat of losing their houses. Not good. Yes, we need financial regulation. Without it, free-marketers will run us into the ground.
Obama Dissed, Volcker Speaks Out Against Bankers Gone Wild
If anything about the financial crisis made you beet-red angry, then you must read Simon Johnson. Johnson is a former chief economist for the International Monetary Fund who wrote one of the best pieces on the financial crisis in print, the Quiet Coup. This week he urges people to pass on the message of Paul Volcker, former head of the Fed Reserve (before Greenspan), and now the head of Obama’s Economic Recovery Advisory Board.
Obama met this week with the heads of the major banks in an attempt to discuss regulation and the return of stability to the financial system. Guess who decided to attend the meeting with the President of the Free World only by phone? If you guessed Lloyd C. Blankfein, the chief executive of Goldman Sachs; John J. Mack, chairman of Morgan Stanley; and Richard D. Parsons, chairman of Citigroup you got it right. (Thanks guys, cause that shows how much you appreciated the use of all our taxpayer dollars!!)
The meeting continued with discussions about executive compensation, regulation, and making more loans available to small business. From the NY Times:
…the banks are seeking to restore executive pay to high levels and asserting that the government’s demand that they hold bigger financial buffers against possible losses makes it hard for them to issue more loans. During the hourlong meeting in the Roosevelt Room of the White House, Mr. Obama prodded the executives to stop fighting the regulation legislation intended to deal with the problems that led to the financial crisis”
Paul Volcker was one of the few outspoken critics of the unprecedented response by the Federal Reserve in the financial crisis. Far oversimplified, he did not agree that it was a good idea to bail out failing banks at all.
After President Obama’s meeting with the top banking executives, Volcker had this to say (emphasis added):
Every day I hear financial leaders saying that they are necessary and desirable, they are wonderful and they are God’s work. Has there been one financial leader to stand out and say that maybe this is excessive and that maybe we should get together privately to think about some restraint?
I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of? [...] Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.
Paul Volcker and Simon Johnson for the win.
Classic Liberalism: A Chance for Political Parties to Unite
In the old days, say 1850 and before, the country operated fairly heavily in the realm of “Classic Liberalism.” Classic liberalism is defined roughly this way:
Freedom of religion, freedom of speech, freedom of the press, and freedom of assembly were core commitments of classical liberalism, as was the underlying conception of the proper role of just government as the protection of the liberties of individual citizens. Also central to classical liberalism was a commitment to a system of free markets as the best way to organize economic life.
John Stuart Mill (‘Over himself, over his own body and mind, the individual is sovereign’) and John Locke (all true power of governance derives from the people) laid out the fundamental ideals of Classic Liberalism. Adam Smith is another famous proponents of Classic Liberalism, sometimes called laissez-faire liberalism. But somehow the country drifted away from these core tenets. Some of that drift has been justified correction. Some has been radical ideology worming it’s way into the basic configuration of constitutional intent. Some have radicalized the intent of Classical Liberalism turning it into full-fledged Libertarianism. At it’s best, Classic Liberalism provides core values that both parties can agree on, even if they arere split over the finer points of its implementation.
The Republican Party has become the bastion of theocrats hoping to Christianize the country, and self-serving arses who say any dollar earned is a good dollar despite environmental harm, harm to the greater good, or harm to individuals. It seems to have become the party to protect senior citizens from those greedy young people. At its best, it supports fiscal conservatism, a staunch adherence to the right to individual liberty, and — surprise! — land and environmental conservation.
The Democratic Party has been hijacked by misguided political correctness leading to a “we solve all your problems” brand of immature and fiscally reckless governance. It’s become the party that protects illegal aliens from paying for anything. At its best, it supports a moderate safety net, corrects for legal social injustice (like Jim Crow laws), and protects the environment. Democrats have supported individuals over corporations in the form of unions and labor laws.
Both parties could use a return to some of those core ideals in Classic Liberalism:
- Fiscal Conservatism: NO ONE should spend more than they have, not government, not individuals. How did we become a country that embraces debt as a money-making tool? It’s just wrong. Many Classical Liberals supported the Gold Standard. The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency. If not the gold standard, then at least adherence to hard currency and limits to or complete elimination of fractional reserve banking.
- Separation of Church and State: All people should enjoy the right to worship in the most personal and meaningful way. And this should have NOTHING AT ALL to do with government. See Thomas Paine’s Age of Reason.
- Legislative Restraint: No law should be passed, no individual liberty abridged, without a fundamental justification of its necessity. In other words, seatbelt laws save lives and money, yet constrain individual liberty. Our bar has been lowered way too far allowing laws to abridge individual freedoms in exchange for a nanny state. Once these laws are passed, like taxes, they never come back. Laws should be passed in the protection of freedom and to provide a reasonable framework for constitutional rights to be expressed in contemporary times (e.g. bans on automatic weapons and profit raiding or other modern excesses the founders could not have foreseen).
- Smaller Government: This one’s tricky for all of us these days. All government programs should be lean and efficient, including the military and the safety net of social programs. The military is bloated. Medicare is bloated. Prisons are bloated with non-violent offenders. State and county budgets are trying to cover more and more. As a result, taxes are going only one way: UP! The role of government at every level must be delineated.
- Individual Responsibility: Inherent in the ideas of John Locke in the concept that the individual is the government. Individuals must step up to the civic plate by voting and participating as officeholders. No more “They did it!! They made our taxes go up.” They are we. We must ensure that laws are reasonable, pay taxes for all the benefits we enjoy, and propose tangible solutions when we see problems. A passive citizenry leads to no good. Keep the participation constructive and push for solutions. Work hard to earn stuff. No one owes you anything.
Two immediate issues call for Americans to unite to find suitable solutions: the Banking Crisis, and Climate Change.
Regarding the banking crisis, Classical Liberal economists (Smith, and to some extent Friedman) argued against regulation since they believed that enlightened self-interest would preserve the system and constrain the greed-factor. It hasn’t. There’s been an egregious lack of the “enlightened” portion of that behavior. Classical Liberalism sought to balance the right to entrepreneurial pursuit and the right to protection of the individual over more powerful entities. Post economic meltdown and bail out, the more powerful entities seem to have gained the upper hand.
Where Climate Change is concerned, we are currently in the throws of a philosophical dilemma best summed up in the analogy called the Tragedy of the Commons.
The tragedy of the commons refers to a dilemma described in an influential article by that name written by Garrett Hardin and first published in the journal Science in 1968. The article describes a dilemma in which multiple individuals acting independently and solely and rationally consulting their own self-interest will ultimately destroy a shared limited resource even when it is clear that it is not in anyone’s long term interest for this to happen.
The phrase usually does not refer to the article but to the dilemma itself, typically in talking about a circumstance to which it is thought to apply. Perhaps most who use it are not aware of, nor have read, Hardin’s essay but are looking at conceptually parallel situations.
Central to Hardin’s article is an example, a hypothetical and simplified situation from medieval land tenure in Europe, of herders sharing a common parcel of land (the commons), on which they are each entitled to let their cows graze. In Hardin’s example, it is in each herder’s interest to put the next (and succeeding) cows he acquires onto the land, even if the carrying capacity of the commons is exceeded and it is damaged for all as a result. The herder receives all of the benefits from an additional cow, while the damage to the commons is shared by the entire group. If all herders make this individually rational economic decision, the commons will be destroyed to the detriment of all.
The Constitution intended to protect the common good. It seems that any party for the future needs to heed the lesson of the Tragedy of the Commons and provide a solution that accommodates a reasonably regulated and protected model for shared resources. The Constitution does not cover this explicitly. So far, the Democrats seem to have stepped up to this plate somewhat while the Republicans bury their heads and deny the threat of unrestrained population growth, environmental degradation, and resource depletion (see peak oil).
Neither party has come anywhere near solving our Bankers Gone Wild problem.
But the main point of this post is this: We can agree on most of what made, and still makes, this country great. Glenn Beck, Rush Limbaugh, and Daily Kos all spout hatred and sowing chaos where we should be looking for common ground. We have some big issues to attend to as a country. The sooner we join forces to get back to our core values the sooner we’ll find reasonable solutions.
Charts & Graphs & Flowcharts, Oh My!
My husband and I disagree somewhat on our politics. I believe we’ve entered a stage of “Argentinian Democracy” where the top 1% wealth owners have betrayed the trust of the people by overstepping the boundaries in a greed orgy that lead to big take-home pay for the executives of multinational companies and investors in hedge funds. He believes the people who took out all those mortgages and couldn’t pay them are the greed problem and the reason our economy is in the state it’s in. The sad fact is that we’re both right. What a mess! It’s so complicated that most people can’t grasp the complexity of what went wrong. To the rescue come graphic artists! Check out FlowingData.com for a list of 27 graphics to help us all understand what went down and to visualize how much it costs.
Don’t look if you don’t want to know. The graphics are awesome, but they paint a pretty ugly picture.
TALF: Our Government Bribes Hedge Funds to Return Money to the System
What I don’t understand at this point is why the Obama administration and the Treasury are not instituting a MASSIVE OVERHAUL OF DAMAGING INVESTMENT PRACTICES. Well, I do know why. The entire Federal government is in bed with the ultra-wealthy, who in fact are the very investors that average Americans are now suffering under. They made millions, they lost millions; everyone else lost jobs.
The latest government program, called TALF, offers super low-risk loans to hedge funds and private equity firms to re-invest in America. Did I say hedge funds?! I did. Because, let’s face it, they’re the only ones with any cash around here. And I can’t understand why no one is making a peep about this. Here’s an excerpt from a WSJ article that outlines the program. I’ve added some bold bits:
Hoping to jump-start the financial system, the Obama administration is considering turning to a new program run by the Federal Reserve that has been a challenge to launch and depends heavily on hedge funds. The Term Asset-backed Securities Loan Facility, or TALF, was announced in November after investors stopped buying securities backed by consumer debt. Under the $200 billion program, the Fed will make loans to almost any U.S. firm that is willing to use the government financing to buy securities tied to credit-card, small-business, student and auto loans.
Some hedge funds, which often use borrowed money to boost returns, are lining up to get in on the Fed program, seeing a chance to make high double-digit-percentage returns with little downside using low-cost loans made on easy terms. Some officials inside the Fed are nervous about relying on unregulated hedge funds. But they see it as a trade-off in order to get capital to consumers.
Broader philosophical issues could arise if the program is expanded. The White House has promised more transparency in how its funds are used. But lending to hedge funds may be problematic because their operations are opaque. Moreover, the program depends on many of the practices that helped to fell Wall Street firms in the first place, such as leverage, structured-debt investments and a dependence on credit ratings. Depending on the different types of collateral, investors will get roughly $100 of lending for every $5 to $16 of cash they put up to invest. The rate investors will have to pay will be set at one percentage point over interest rates based on London interbank offered rates.
The loans the Fed makes to investors are nonrecourse, meaning investors can’t lose any more than the money they put upfront on the security. If a hedge fund defaults to the Fed, its collateral is the securities themselves. There also are no margin calls, meaning the Fed can’t demand additional payments of cash from borrowers if the underlying securities fall in value. Investors see these as important inducements to the program. But a Treasury Department inspector general warned that the program was vulnerable to fraud by the private sector.
The activities of hedge funds are another potential issue. Some investors have privately expressed worries that hedge funds could game the system to use cheap Fed financing to fund other trading positions that run counter to U.S. goals. A firm might, for instance, buy debt backed by car loans with Fed financing and use the cash flows from the investment to fund short positions on auto makers that pay off if they struggle.
We are over a barrel here for the very reason that the hedge funds (the ultra-wealthy) still have all the money. In our country, it’s pure blasphemy to suggest that these private persons have too much money. That would be socialist and evil. We’re supposed to support the ultra-wealthy since they are kind enough to open factories and high-tech companies and give us jobs. But let’s call a spade a spade. The government is now offering bribes to these hedge funds to get them to return all the money they’re hoarding so we can have it back in the system, please, pretty please!, to fund our student loans and auto loans. And we’re trusting them not to short-sell on the investments, which they will be horribly tempted to do to hedge their investments. Yeah, hedge-funds.
Hmmm, something is not working here.
p.s. Great write-up about the TALF plan from a blog called Automatic Earth.
A World-Crisis: One More Opportunity to Play the Blame Game
Wow. There’s some heavy stuff going down in Washington. And once again, I am loathe to trust anything I hear because it’s all so steeped and occluded in “messaging,” “spin,” and deluxe finger-pointing. It’s really hard to be an informed citizen these days. You begin to feel as though there really is no TRUTH. Just somebody’s version of it. And as in all things politics, it’s being bent to serve a purpose.
From today’s decidedly left-leaning HuffPost:
Some people have been wondering whether Dick Cheney and George Bush, to preserve their legacy and their secrets, would spring an October surprise to secure the election of John McCain–the clearest and almost the only urgent goal of this administration as it winds down. We have wondered whether the trigger could be in Georgia, or Iran, or Pakistan. Yet the banking crisis, in the manner of its management, now looks like the October surprise one week early and with one week longer to turn it to advantage.”
Gawd. Really? I mean, could that be true? I think not. I think the people in Washington can’t help working every situation to their advantage, but I guarantee that this crisis was not “manufactured.” A ridiculous assumption. There are too many people in Washington, including Pelosi, Barney Frank, and a gazillion others who would be aware of it. It’s cynicism maximized into paranoid delusion. That said, would the Bush Administration and Cheney, et al, work this situation to their advantage? Yup. No doubt. One begins to wonder: if the result is the same as if it were manufactured, then there are far scarier things going on in Washington than I can stomach. I am naive enough to believe that the leaders of our country, ALL of them, care about the people and want to do what’s right. Greater good and all that.
Republicans, on the other hand, argue that the Clinton Administration forced the bad subprime loan practices by insisting that low/no credit borrowers be allowed to borrow anyway (Community Reinvestment Act). According to Investor’s Business Daily (emphasis added):
The untold story in this whole national crisis is that President Clinton put on steroids the Community Reinvestment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but “predatory.” Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the ’90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.
Uh, yeah. So, all that subprime credit was just irresistibly JUICY and the Democrats practically FORCED all those poor victimized hedge-fund managers and senior-level Wall Street investors to re-package it and sell it worldwide in a disguised form that then crumbled everyone’s assets. I understand. It’s quite clearly the Democrats’ fault. Those bad, bad social engineers and their JUICY, JUICY subprime mortgages! It was NOT POSSIBLE TO RESIST THAT TEMPTATION. Kind of like Eve bringing down the whole scene and the downfall of all humanity. Really. All her fault. Democrats. All their fault. Nothing to do with de-regulation at all. (Which, some Democrats supported, I might add.)
The important take-away for all this is to choose a side. Be sure to rant whenever possible about FAULT and point-
fingers. Be sure to maximize cynical thinking by looking intensely for political maneuvering rather than solutions. McCain’s decision to delay the debate seemed like a good idea. I was a little shocked by the Obama camp objecting to debate delays. I’m sure all he heard for days was, “Don’t do it! That’s what they want!” Then I read his statement that the American people need the debates more than ever. Oh yeah. Dang. It’s so hard to remember what I want!
Dood. All WE THE PEOPLE want is to know that our representatives are responsible, clear-thinking individuals who will do what’s right for the greater good. It’s just world markets we’re talking about. And remember, if you’re going to seek some completely unprecedented solution? Maybe you can make sure there’s some justice involved. Those bankers came from both parties. Jails don’t care who you voted for.
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