Revolution and Reform

Many of us bloggers are better at criticizing than at proposing anything — especially when the world makes it so easy to be a critic. The Epicurean Dealmaker, who has sent the occasional volley of criticism my way (I’m not linking to examples because my ego is too fragile), recently decided to deal with this head-on and wrote a “reformist manifesto,” complete with an epigraph from The Communist Manifesto, with a list of specific proposals.

Basically these include cleaning up the regulatory structure, expanding the scope of regulation (consumer protection, hedge funds), moving “virtually all” OTC derivatives onto exchanges or clearinghouses (I believe that “virtually all” means the currently-proposed exemption for “end-user” hedges would be drastically reduced), and increasing Fed transparency. There is also this one: “Ban political campaign contributions by the financial industry.” I think that would be great, although there is at least one constitutional problem and possibly two there.

There’s nothing on the list that I disagree with.

However — and there’s always a however — I worry that it won’t be enough. TED consciously leaves the details to what he hopes will be “strong, competent, and well-informed regulators.” Several of his proposals, such as rationalizing Congressional oversight (to eliminate the current situation where the industry can arbitrage between the Senate Agriculture and Banking Committees), should help mitigate the problem of political interference and regulatory capture, but will it be enough? After all, George Stigler’s paper on regulatory capture wasn’t about the financial sector in particular — it was about all regulation, all the time.

In a sense, this comes down to whether you place more faith in Congress or in regulatory agencies. I know defending Congress is a tough sell these days, but for example they did pass something called the Clean Air Act about forty years ago. And when, under the Bush administration, the EPA decided that greenhouse gas emissions didn’t fall under the Clean Air Act, the Supreme Court told the EPA it had to enforce the law. That said, there is also a famous 1984 case in which the Court said that in general regulatory agencies were free to interpret statutes how they choose, so this is not a black-and-white topic.

As far as what I would do instead or in addition, I lean toward Simon and Peter’s earlier post, although Simon and I have had some discussion of the details since then.

You’ll note that TED’s post is not on his personal site, but on The New Decembrists, a new site where he hopes to aggregate discussion regulatory reform in particular. (Bonus points for the historical reference, although that’s nothing new for TED.)

By James Kwak

26 responses to “Revolution and Reform

  1. I didn’t even know what a Decembrist was ironically until about 2 days ago, reading a months old New Yorker article a writer wrote about traveling across Siberia in some shitty old Renault. I guess I’m exposing how great my education was or something. It was a good article. My guess is those folk’s stories got romanticized quite a bit by Lenin’s “Historical Bureau” or something of the sort, but they were probably pretty cool for their day.

    Although I don’t follow “TED” very closely other than his occasional posts here in the past, my guess is I agree with him on a great deal many things. But when he presents it the way he does (with the Decembrist title) he makes the common Democrat or lefty mistake of opening himself up even more to “pinko” and “Commie” attacks to be brushed off without anyone reading than if he put some thought process into his titles and presentation a little more.

    I certainly agree with TED on the ban political campaign contributions by the financial industry. Let’s put a ban on political campaign contributions from health insurance corporations in there also for our “favorite” (haha) U.S. Senator in Montana.

  2. I don’t know if a ban on campaign contributions from one particular group would hold up in court. Instead, let’s ban campaign contributions from all organized groups. Limit contributions to individuals and limit the amount they can give.

    If we take the money advantage away from big corporations, Political Action Committees, special interest groups (NRA, religious organizations, U. S. Chamber of Commerce, etc,) maybe the average citizens of the United States can regain control of our government.

    Of course, we are relying on Congress to pass such laws, so I’m not holding my breath.

  3. The debates about the mechanics of regulations are obviously important. The problems of capture and responsibility are very real. Yet, in a way that requires a bit of explanation, I think a focus on the details can go too far and be self-defeating.

    Let me explain.

    No regulatory scheme can ever be perfect. Nor can any scheme be workable for all time. The readiest critique of any regulatory scheme is that the financial industry will be quicker than the regulators to invent new ways to escape meaningful constraints. We read these sorts of arguments all the time.

    So, while the details are always important, it is more important to restore a culture of regulation, an expectation that anything systemically important must be monitored and regulated for the good of society.

    We are barely emerging from a 30 year stretch in which the dominat ideology has been religiously anti-regulatory for the sake of being anti-regulatory, as well as for the interests of firms and lobbyists, etc, who have made a killing.

    Regulation will always be playing catch up in a properly functioning liberal capitalist democracy.

    What matters is that we keep talking about better ways to do it, with better not including the idea that wholesale sweeping away of regulations is better.

    The root failure of regulatory authorities over the past couple of decades emanates from the cultural and ideological conviction that eliminating regulation is always best. When the dominance of that ideology took hold, it did not matter if regulatory authority was assigned to Congress or the Fed or the SEC or any other body, for all believed the same thing at heart. Regulatory capture became redundant, if not superfluous.

    The biggest battle to win is not the details of any one regulatory measure in any one instance. The biggest battle to win is over the culture and ideology of regulation in our society. For 30 years, the phrase regulatory reform has meant deregulation. If we reverse the great loss of the past 30 years, then we set in place the assumption that regulation can work, that it protects the society in good ways, and that reform means improving the details and improving the system, not abolishing it.

  4. Ray, you bring up a good point “take the money advantage away from big corporations”, except that this will never happen Congress would never pass these laws and we do live in a capitalist nation or so I hope we do.

  5. But when he presents it the way he does (with the Decembrist title) he makes the common Democrat or lefty mistake of opening himself up even more to “pinko” and “Commie” attacks to be brushed off without anyone reading than if he put some thought process into his titles and presentation a little more.

    Hmm, it sounds like you’re saying you’re part of the problem there. Hidebound prejudices. Meanwhile last spring a poll found a high level of openness to the term “socialist” among regular people.

    It’s clear that the people have a far more intrepid attitude regarding Wall St and the bailout than the sclerotic government-MSM establishment.

    It’s funny that Decembrist is too outlandish a term for you, because I was going to say it sounds rather cautious (although nicely poetic).

    But it does fit the reform program suggested. Nothing to really fix the structural issues. He says he intentionally leaves off most legislative aspects and wants to repose most trust in regulators, but we know regulation can’t work so long as the rackets exist.

    We really are going to need the structural revolution:
    break up TBTF, not just separate real banking from the casino but get rid of the casino completely, restore the sector to partnerships, and across-the-board campaign finance reform, not just for the sector.

    Only this can reclaim the country and get this hideous leech off our backs.

  6. Just last week, the House agreed not to change anything on the estate tax law. This hardly received the media attention it deserved.

    ¨The 2001 tax-cut law has scaled down the estate tax considerably. Under the current rules, only the largest 1 in 500 hundred estates pay any tax; that is, 99.8 percent of estates are passed on completely tax-free. For the relatively few wealthy estates that are taxable, the tax applies only to the value of the estate that exceeds the exemption level of $3.5 million per individual or $7 million per couple. Because of this and other tax breaks built into estate tax law, taxable estates owe less than 20 percent of their value in tax, on average. An individual can inherit, tax-free, a trust fund worth $3.5 million, or more than a middle-class family that makes $70,000 a year earns in a lifetime.¨!!!

    http://www.cbpp.org/cms/index.cfm?fa=view&id=3017

    When reading about how those Wall Street crooks took home tens-of-millions year after year, insisting on ´bonuses´ even now, I always wondered: why do they want so much money; it is not that they can take it with them in their afterlife, like in the ancient Egypt pyramids.
    Well, now I know: they can give it to their offspring for generations to come: aristocracy, just like in ancient Europe. Unless of course, we the people reform the estate tax, at least clawing back part of the taxpayers funded profits.

    James: ¨In a sense, this comes down to whether you place more faith in Congress or in regulatory agencies.¨

    Well James, what do you conclude that you need to go back 40 years (!) to come up with an example?

    Also, what do you conclude when a senator (of the president´s party) only votes to merely start discussion of the health care bill, AFTER she has been promised $ 100 million for her state in additional money? Just 1 example of the infinite examples of the last decades. So, until complete campaign finance reform, let´s forget about Congress.

    Then what about regulators? James: ¨TED consciously leaves the details to what he hopes will be “strong, competent, and well-informed regulators.” ¨

    As far as financial ´services´ regulators are concerned: they are up against ´strong, very well informed – heck, they invent all those ´innovations´ — ultra-rich, and – now we know– unscrupulous financial firms. Hence, the basic rule should be: only try to regulate those financial services that truly service society, and prohibit (yes, you read that one right: prohibit, not regulate) that which does not service society. Oh, and let´s be clear: speculation, millisecond computer program trading, CDS etc. — whilst generating tons of profits for bonus banksters – do not service society.

  7. David Mercanus

    The mistake many make is not understanding that policy choices (and the politics preceding the choices) are all about what is politically possible, not optimally desireable. And this is because of campaign finance regulations. The financial sector, like any large actor, is able to throw its weight around and put the brakes on any changes. They can game the system, so they do.

    This is how we should perceive the debate, not as a failure of any given policy choice. It is mostly systemic.

    We need to fix this aspect of the system before we can expect to get anything close to timely and optimal policy choices. Until then, we get incremental movement at best.

  8. It is not very auspicious for political success of reformist ideas to choose such abject political fools as the Decembrists as a source of inspiration. Reformist ideas are by nature reactionary. Reform tries to fix what has failed. How many hundreds to thousands of ” reform” acts has Congress passed that must, given the state of the nation, be construed as failures to ” reform”?

    The central political fact of US life today is utter inability to organize effective political opposition to the present elite factions. How many unchangeable monocause personal belief structures are out there preventing creation of factions sufficient to galvanize mass support for empowered political action?

    Commonwealth requires sufficient give and take between factions to put forth sufficient political power to achieve workable commonwealth. The land of the political paranoid true believer must decline a lot further to burn out political paranoia to the point beliefs are sufficiently abandoned to allow working factions to present common action to emerge.

    In the meantime, present elites understand how to keep their power. What these same elites do not understand is that they are destroying themselves and us in the process.

  9. “After all, George Stigler’s paper on regulatory capture wasn’t about the financial sector in particular — it was about all regulation, all the time.”

    James, this is exactly why your TBTF proposal (to limit liabilities as a percentage of GDP) needs to be extended to ALL companies, regardless of their business. Auto makers, monoline insurers, airlines, Wal-Mart, EVERYONE.

    The beauty of this arrangement is that it is a very hands-off approach (I.e. We don’t care how big you get, as long as you are funded with equity, rather than other peoples money).

  10. Jerry: “What these same elites do not understand is that they are destroying themselves ”

    Care to give examples?
    I do not see that happening. These elites have hedged themselves for whatever may come…. land plots, houses (1 on every continent), gold bullions, tax haven bank accounts, etc. With their private plains, they move around almost as fast as their millisecond-computer-algorithm-speculations.

  11. Given what happened to the original Decembrists, I’m not sure that’s the flag to fly. Just to make it a bit clearer, why not The Seven Who Were Hanged?

    (I know that only five Decembrists were hanged, I’m referring to the Andreyev short story)

  12. I will confine myself here to financial elites first. Literally, every asset on a financial company balance sheet is directly or indirectly based on the desire of retail debtor to pay his contract to fulfillment. Financial elites have done everything possible to ignore this literal fact about a mass economy where the source of financial wealth is the desire to borrow for consumer goods and services. The elite assumption is that the desire to live up to a financial contract will remain within the narrow loss parameters built into their financial product models.

    Boldly put, if even 10 % of all retail debt were lost from the next step after desire to pay ceases which is inability to pay the present valuation system of marketing promises to pay collapses prices.

    Even commercial production source promises to pay are based on desire to purchase the production which is dependent on retail desires. Scare the living daylights out of both desire to borrow and desire to purchase the goods at all retail levels and the financial elites themselves lose the value of their personal wealth.

    Present elites are obsessed with off loading risk which is systemically an illusion unless the retail sources of financial wealth maintain their desire to continue buying borrowing and paying.

    The whole economic system involving credit, and we live in a total credit system, remains viable or none does carried far enough. The first losers marginally in a long term decline of economic borrowing desires in a credit system are the middle person financial elites.

    Just what is the marginal loss element that ends the elite values in any credit system? It is certainly not much more than the top 10-15 % of systemic retail source cash flows.

    Certainly, the elites with stock option based wealth in the major financial institutions have lost most of their wealth. Wipe out their shares entirely and most are probably insolvent. That is why what i see going on smacks of a fight to the death of the elites wealth source. Losing 2009 bonuses on top of last years losses must be very damaging since they are not able to recoup losses.

    Tax haven assets are a claim on someone’s promise to pay them or ability to maintain profits on which stock values are based too.

  13. James, perhaps you would like to weigh in on the attack on Sarbanes-Oxley now being heard by the Supreme Court….

  14. Lavrenti Beria

    The man just does not get it. There will be no reforming of this system via parliamentary methods. It is hopelessly self-perpetuating. Expecting the the resident lice to alter a campaign financing system that has led to their personal enrichment is a fairy tale. And voting out incumbents won’t do it either. The lobbies will have checks in the hands of all-too-willing-to-accept challengers just as fast as you can say “bribe”. There is one and only one method that can effect a meaningful restoration of our democracy and that involves massive public demonstrations and strikes. Only then can there be a genuinely fresh start and any real possibility of arresting, interning, interrogating and publically trying these fungi.

  15. True, we do live in a capitalist society, but that doesn’t mean our politicians should be for sale. Like I said, I’m not going to hold my breath until Congress does anything about it.

  16. “Basically these include cleaning up the regulatory structure, expanding the scope of regulation (consumer protection, hedge funds), moving “virtually all” OTC derivatives onto exchanges or clearinghouses (I believe that “virtually all” means the currently-proposed exemption for “end-user” hedges would be drastically reduced), and increasing Fed transparency. There is also this one: “Ban political campaign contributions by the financial industry.” I think that would be great, although there is at least one constitutional problem and possibly two there.”

    Yes, they will scream about the First Amendment, as always. So, this idea needs to be embodied in a law regarding campaign reform and lobby reform. And, this should apply to all areas, not just finance. The problem being that lobbies and campaign finance tend to fully warp the playing field in ways that almost always result in vast social imbalances. This goes especially strongly for finance, health care, and especially the IRS Code (a complete and utter travesty!!!).

    “In a sense, this comes down to whether you place more faith in Congress or in regulatory agencies. I know defending Congress is a tough sell these days, but for example they did pass something called the Clean Air Act about forty years ago. And when, under the Bush administration, the EPA decided that greenhouse gas emissions didn’t fall under the Clean Air Act, the Supreme Court told the EPA it had to enforce the law. That said, there is also a famous 1984 case in which the Court said that in general regulatory agencies were free to interpret statutes how they choose, so this is not a black-and-white topic.”

    Congress, being the blind group of squirrels that it is, does occasionally find an acorn, but without the previously mentioned reforms, we will continue to get the kind of governance we have, which protects the “haves” and rejects the “have-nots” (majority of us), to the detriment of our future as a country.

  17. If special interests (that are NOT individuals eligible to vote) must be allowed to make campaign contributions, hold them to the exact same limits as individuals.

  18. We live in a capitalist nation? Really?

  19. Can't think of cute name

    One type of funding system I don’t see which might address this issue is a sort of money-back guarantee pledge drive: Individuals contribute to a campaign fund with an advertised funding threshold. If the threshold is not met, all contributions are electronically refunded. You could have a website where multiple prospective independent/3rd party candidates can each run one of these in parallel, and each one’s current funding level can be viewed by visitors. I think this approach would allow people to more efficiently forge compromises in a somewhat anonymized way.

  20. Desperate For Economic Growth: The More Things Change, The More They Stay The Same.

    Obama on the economy:

    “We’ve got a long-term structural deficit that is primarily being driven by health care costs, and
    our long-term entitlement programs. All right? So that’s the baseline. Now, if we can’t grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who’ve got jobs are paying taxes and businesses that are making profits have taxes – are paying taxes. That’s the most important thing we can do.”

    http://news.firedoglake.com/2009/12/04/obama-rejects-immediate-deficit-reduction

  21. The proper answer to political donations is that if you cannot vote, you cannot donate. Corporations are not people, but merely aggregates of individual people, each with their own independent political views, thus a corporation cannot have a political view because it isn’t a single individual.

    No donations from entities that cannot go to a polling station and place a vote. Period.

    Better, no more donations at all. A government fund for politicking be established (public funding) that is disbursed equally to candidates who are bringing in more than X percentage of supporters. The percentage should be low enough to allow for more than just the two major parties to actually see a competitive financial position in the campaigns but not so low as to allow total loons and silly candidates to have equal footing.

    Corporations are NOT people. That, on its face, stupid ruling by the SCROTUS needs to be reversed post haste. People are people. THEY have rights. Corporations don’t have any such rights…otherwise the Founders would have recognized them as such when they wrote the freakin’ Founding Documents, BUT THEY DIDN’T. Corporations back then were merely short term economic entities with no rights comparable to an actual living, breathing, thinking human being. Time to get back to fundamentals like that.

  22. That is a good suggestion and alternative. If I, as an ACTUAL human being can only donate $2000 max (or so) then that is the max that any corporation, PAC, etc, can give. This limit must apply across the board to both individual candidates and the parties themselves.

    Also, strictly limit third party political adds. Limits on those should be applied to candidates and parties and those same limits should apply to third parties/entities.

  23. We lived in a capitalist society before we had big corporations. We lived in one after the trust-busting of Teddy Roosevelt. We are in danger of returning to the time when legislatures were “the best that money can buy,” if we have not done so already. Capitalism does not require either mega-corporations or corrupt legislatures.

  24. “After all, George Stigler’s paper on regulatory capture wasn’t about the financial sector in particular — it was about all regulation, all the time.”

    Really? That is a very strong statement. Has the Medical profession captured the DEA? Have the Native Americans captured the Bureau of Indian Affairs? Has the AAA captured the Highway Patrol?

    Our culture carries on the Roman idea of a government of laws, not of men. OC, that is a half truth, but is it a total myth?

    Some weeks ago an article in the New York Times Magazine about the economy mentioned the example of a foot bridge that swayed dangerously. It turns out that small lateral movements that people make while walking got amplified when those movements caused the bridge to sway slightly, and that led to people making larger movements to compensate for the swaying. This induced larger swaying, and so on, in a positive feedback loop. After the engineers analyzed the problem, they put in lateral shock absorbers, which stabilized the bridge.

    I wonder if our current financial regulation is like having a number of regulators stand on the bridge and tell people where to step. OC, the directions of the regulators would cause people to feel unsteady, even in some cases to fall, and they would resent that and resist the regulation. Meanwhile, the bridge would remain unsteady. The whole idea of regulation by micromanagement and incentives seems to me to be asking for trouble.

  25. Actually, the decision in Santa Clara County vs. Southern Pacific Railroad, the alleged precedent for corporate personhood, doesn’t even include any such notion.

    Rather, the chief justice made an informal comment which the court reporter, an ex-railroad cadre, included in the preface. (In a letter exchange afterward they confirmed that it was an attempt to smuggle the notion into the decision without it actually being argued and voted upon.)

    It’s called an obiter dictum, and it has no validity as precedent. That corporatist judges have chosen ever since to interpret it as having value simply reflects their extralegal, anti-constitutional ideological bias.

    A few days ago I wrote a short blog post on the subject:

    http://attempter.wordpress.com/2009/12/07/corporate-personhood-a-suggestion/

  26. “Many of us bloggers are better at criticizing than at proposing anything.”
    All right. Buy a rice bowl.