The Restoration of Confidence

The restoration of confidence—based on just plain common sense—requires a clear diagnosis of what went wrong, a plan to implement corrections, and then a disciplined working of the plan. What doesn’t work is treating symptoms. And letting nature solve the problem is, in effect, to abdicate.

In our present situation the causes of our crisis are (1) failure to regulate the financial system so that a mortgage bubble could arise; (2) globalization which drained jobs from the domestic economy while flooding it with cheap goods; and (3) fighting expensive wars overseas while cutting the taxes that should have paid for them. Have I left out something basic? I don’t think so. There are all kinds of bad theories behind the wrong-headed decisions, but that’s another story. The worst of these is giving market forces free rein in the belief that they will invariably produce optimal results. Markets must be regulated—much as farmland must be cultivated to yield crops. Nature will not do it left to its own devices.

If we heard this diagnosis from the highest levels—and necessary changes proposed to correct the wrongs as soon as ever practicable—confidence would then return because all of these things are self-evident, common sense, and the public would immediately sense some comfort.

The solutions are very drastic regulation of the finance sector. This would include limiting speculation, prohibiting computer trading and all kinds of derivatives markets, mandating high reserve retentions in every kind of banking and insurance, including investment banking. The solutions are protecting domestic employment by consistently and rationally-framed tariffs. By “rationally-framed” I mean that goods or services imported from overseas should cost, after the tariff, the same as those manufactured or provided domestically. We need to raise taxes, and such tariffs would help. The solutions are to increase taxes so that what government spends it also pays for by current levels of taxation.

Now, having spelled it out, I’ve also made the difficulties clearly visible. Is such a program possible? Functionally? Yes. Will it take time? Yes. Will it be difficult? Yes. Will it mean withdrawing from various international compacts? To be sure. What it would require is vast public support—because it would be painful, here and there—but largely for the financially swollen fifth quintile of the population only.

Until I hear something like this articulated forthrightly by some credible segment of our leadership, the crisis of confidence will not be solved. It might eventually seep away as nature takes its course. But in the aftermath a much larger percentage of the population will have sunk beneath what we are still happily calling the middle class.

When Cynicism is Rational

On July 26, 2010, thus five days after its passage, Fox News ran this headline: As Finance Bill Passes, GOP Calls for Repeal. The finance bill in question was the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law as published (here) is divided into sixteen titles and runs 849 pages in length. Some of the more thoughtful summaries of it run more than a hundred pages. Herewith a summary of summaries, thus just a list of hoped-for results. The act…

• Creates a consumer protection watchdog agency (Consumer Financial Protection Bureau); CFPB has some regulatory powers.

• Ends to big to fail, by requiring higher capital requirements, prohibiting tax-payer bailouts, establishing rules for orderly liquidation, and more.

• Creates a council to look ahead and to warn of impending repeats of the last fiasco (Financial Stability Oversight Council); FSOC can, by 2/3 votes, cause the Federal Reserve to act in some instances.

• Makes exotic instruments (derivatives, hedge-funds) more visible to the public, the hope being that that will have a positive effect.

• Regulates compensation of executives by giving stockholders more powers.

• Regulates credit rating agencies by creating an Office of Credit Ratings within the Securities and Exchange Commission

• Strengthens already available oversight and enhances enforcement powers.

According to DavisPolk, a law firm and leading tracker of this legislation (see here), the act requires 387 different rulemakings by 20 different agencies. Of these 275 have deadlines, 112 do not. Of those that do, 129 must be made by the third quarter of 2012, 46 after 2012. As of May 1, 2012, 148 rulemakings were supposed to have been completed. Only 21 were finalized, another 97 had been proposed, and 30 deadlines had been altogether missed. I’ve reproduced a pie chart DavisPolk provides. What it says is that, essentially, we’re not even near.

I’ve spent multiple years of my life in the EPA with initially 300 and later 150 people trying to implement a law that was about 25 pages in length—and one agency, alone, responsible for it. Here we have 20 agencies and 849 pages. To that now famed phrase, Too Big To Fail, we can rationally join another: Too Big To Regulate. Senator Dodd and Representative Frank, bless them, gave it the college try. To another old phrase—The mountain labored and brought forth a mouse—I now propose to join another: The planet labored and brought forth a bacterium; alas it was dead. The GOP’s strategy of defeating Dodd-Frank is centered on delay. Maybe they can also gain the Senate and then repeal the package as a whole.

Alas and alack, only draconian measures would have worked. Let me spell them out. Outright bans of exotic instruments like hedge-funds, futures trading, and all derivates should have been the first paragraph of Title I. Legislatively required and numerically stated reserve requirements by banks should have come next. Then in titles III, IV, and V (say), the bill might have established commissions and boards and such to study the subject more, perhaps to ease these drastic measures, always by two-thirds vote, with mandatory deadlines stating, “Not sooner than 2055.”

Draconian measures? Well, there was a guy called Draco once, an Athenian. He put out a code of laws in 621 BC that mandated the death sentence for minor crimes. My own suggestion may therefore not be draconian enough.