You’re currently linking Real Time Economics, Calculated Risk, Greg Mankiw, Justin Fox and…. Ezra Klein? Which of these things does not belong? Which of these blogs is political first and substantive second?

What’s going on James?

Regulators ‘rooted’ in “psychology and finance working on the psychological underpinnings of bubbles and market failure” is a little bit 1950’s. If I were a financier I sure wouldn’t want to be ‘assessed’ by someone in that position who may think he understands my psychological state as well as my intentions in the marketplace… It is sometimes easy to see all the blatant ‘craziness’ of the market. But democracy really is at stake without some sort of neutral measure that is not personally directed at anyone – unless they are committing a crime. And clearly, given the spate of massive rip-offs that have ruined so many peoples’ lives, there is a need for more of that sort of regulating to catch those situations. Otherwise I think that liberal democratic and economic theory need re-structuring and expansion to be able to generate just a few new macro measures.

The same can be said of the tax code.

MCM

“And that, my dear friends, is why today’s Wall Street conspiracy of banks and lobbyists, their well-paid pals in Congress and throughout the federal bureaucracies and regulators, plus their Trojan Horses in the White House, will continue driving America straight into the third meltdown Robert Shiller warns about: Our “vulnerability to bubble thinking is greater than it’s ever been … We recently lived through two epidemics of excessive financial optimism … the dot-com and the subprime … we are close to a third episode.”"

Capitalism without regulation is predation.

From a level playing field perspective, you are correct. However, inasmuch as products from countries like China, India, Russia, Mexico and much of the third world under your proposal done fairly, would be taxed almost out of existence because the pollution regulations in those countries are almost nonexistent, while ours are already incredibly stringent.

Truly, from an economics point of view, this Cap and Trade bill, any way you slice it, drives away the relatively clean production of goods in the US to the big polluters in the Third World and places like China. The Third World produces CO2 and much more toxic wastes at something like six to twenty times the rate the US does based upon studies of how far pollution production has been reduced here in California.

The net result of this bill is crippling of manufacturing capacity in the US and grossly more pollution on the planet.

Way to go, Buraq and Nancy!

Therefore, government should tax on imported goods the same as the domestic producers on the carbon emission. If there is the tax on imported goods with the high carbon emission, it will create some jobs in domestic industry especially in alternative energy and maybe US can get the oversea income from creating the organization to inspect the carbon emission, get fee from the certificate, and sell the new alternative energy. The oil price will be much lower from lower demand; therefore if we apply the bill to all domestic goods and imported goods, we will have the more jobs, more foreign income (lower trade deficit) and lower price or lower cost of living and cost of production.

The recklessness is not enforcement of the bill on foreign goods and foreign production and it turn the economic situation worse, rather than better.

Not only have they been feeding the “too big to fail” but also they also empowered the “too few to follow” credit rating agencies.

Also unspoken and unrecognized by those calling for increased regulation is how individuals employed by regulatory agencies advance in their organizations. As will any organization, performance is rewarded. In the case of regulators, performance is measured by how many firms you disciplined. Small firms are easy prey for ambitious individuals in the regulatory agencies. And so, any hope for a level playing field is gone.

I am not saying that big firms never get disciplined. Of course they do. They get audited all the time. But the failure for regulators in the run up to the Panic of 2008 is not due to a lack of regulations. Far from it. Nor is it due to a lack of authority, at least not in most cases. Policy certainly played a role, but, the size of the institutions involved, Citi, AIG, etc, played the greatest role. For an agency to discipline a financial institution of that size takes enormous effort and expense. Simply put, Citibank could hire more and better paid lawyers than the government.

While I have thought a great deal about this issue, I have not managed to see a possible answer. No matter what regulations and/or regulatory agencies you put in place, the small firms will always be easy prey for them, and the large firms difficult to discipline. Until this is addressed, however, the potential will remain for very large problems to grow inside of very large financial institutions.

Another point on this subject is that removing discretion from the regulatory process means legislating mandatory disciplinary actions. This has not worked very well in things like drug sentencing because it has resulted in some extremely long sentences being handed out for relatively minor offenses. In some cases, small drug dealers end up with longer sentences than convicted murderers. This happened because drugs became a hot issue and the public wanted something done about it. Isn’t the financial world subject to the same kind of frenzies, and won’t we have the same kind of problems if legislatures are dictating strict penalties with no discretion on the part of regulators?

So, James, I think, let’s not remove discretion and let’s think about what to do to level the regulatory playing field to remove the built in favoritism received by large companies.

Finally, a word on unintended consequences. Lay on heavy regulations in the US with little of no way around them, and entrepreneurs who find them too restrictive and expensive to get around will leave the country for more liberal locations. Capital formation in the US has already been severely damaged by Sarbannes Oxley. Small companies mostly avoid the public markets today. This is an unhealthy state of affairs because access to capital markets is how they move up to become great companies. It is how Walmart grew, how Home Depot grew, etc. Lay on more heavy handed regs and we will simply drive more of our financial entrepreneurs to London and Shanghai.

What we need, in addition to agencies capable and willing to take on large organizations, is a re-incarnation of the Glass Steagal act in modern form. Regulations forcing greater transparency for hedge funds would also be helpful, as would creating a specialized agency with cross jurisdictional power to regulate derivatives.

Alas, Lawrence Summers says that the repeal of Glass Steagal while he was Treasury Secretary was not a mistake. So now that he is head of the president’s economic team, what are the chances we will get a new version of that great law? About zero, I’m afraid.

But why should CDS’s that are just “making a bet” even be allowed at all? We’ve seen the havoc that they can wreak as the notional values of these bets come to dwarf world economic output. And why should bets on these events, in which one has no stake, be any more enforceable than bets on sporting events and the like?

I think just the change of Presidential leadership will help quite a bit. I think regulators knew that under George Bush the unwritten policy was “if it’s not causing problems, don’t stick your nose in too deep and find problems”.

Yes, it’s great to see Larry and Timmy stepping up to the plate and holding the banksters accountable. Oh, wait…