FDR, Obama & the Cost of Consensus

The Age of Regulatory Capture

Millions of Americans lose their homes and jobs, Wall Street devours trillions in government bailouts while its leaders pay themselves billions . . . and there's still no discussion of meaningful financial reform?

Incredible.

Here's a quote from one of the best Op-Ed piece I've seen this Summer, contrasting the style and attitude of FDR then and Obama now:

The principal legislative innovations of the 1930s were enacted over the vigorous opposition of a deeply entrenched minority. Majority rule, as Roosevelt saw it, did not require his opponents’ permission.

When Roosevelt asked Congress to establish the Tennessee Valley Authority to provide cheap electric power for the impoverished South, he did not consult with utility giants like Commonwealth and Southern. When he asked for the creation of a Securities and Exchange Commission to curb the excesses of Wall Street, he did not request the cooperation of those about to be regulated. When Congress passed the Glass-Steagall Act divesting investment houses of their commercial banking functions, the Democrats did not need the approval of J. P. Morgan, Goldman Sachs or Lehman Brothers.

--Jean Edward Smith, "Roosevelt: The Great Divider"; The New York Times (9/3/09)

Too many details?

How about, "you can't make an omelette without breaking some eggs."

Health Care Debate

The Virtue of Playing Leapfrog

[Note to readers: more real estate-related posts to come . . . this is only a temporary departure. Or, if you missed it, check out the (too?) long weekend post discussing the Southwest light rail line, "How Close is Too Close?"]

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While this blog isn't about health care, and I'm certifiably not a health care expert . . . that doesn't seem to have stopped any other bloggers from weighing in about it (and I am a health care consumer, so maybe that makes me qualified).

So, here's my (relatively agnostic) take:

Apparently, the U.S. is the last developed, Western nation that doesn't provide its citizens with some version of national health care.

In theory, being a laggard could be an advantage.

While Honda and Toyota ceded a huge head start to General Motors, Ford, and Chrysler, they also were free to redesign and improve upon Detroit's business and manufacturing model.

The result: they eventually caught up -- and arguably have now left Detroit in the dust.

Another example is computers.

IBM, wedded to mainframes, practically gifted Microsoft the personal computer market.

Today, we talk about Bill Gates' wealth, not the Watsons' (the founding family of IBM).

Regulatory Capture (Again)

At least hypothetically, then, the ability to study how every other industrialized country has handled health care, then learn from their mistakes, would seem to be an opportunity.

The problem seems to be wresting control of the decision-making process from the "incumbents": the insurance companies, pharmaceuticals, etc. who effectively now run and control U.S. health care.

In fact, you could say the same thing about Wall Street and the financial system.

Too often, the regulatory "debate" seems to get short-circuited, because it's all about who sets the agenda.

As I've blogged before, this malady has a formal diagnosis: it's called 'regulatory capture.'

Goldman Sachs, Culprit

Regulatory Capture -- Exhibit A

Goldman Sachs made out on the housing bubble twice: it f---ed the investors who bought their horsesh-t CDO's by betting against its own crappy products, then it turned around and f---ed the taxpayer by making him pay off those same bets.

--Matt Taibbi, "The Great American Bubble Machine"; Rolling Stone (July 9-23, 2009)

Too subtle for you? Try this one, from Taibbi's blog:

Imagine a meat company that bred ten billion rats, fattened them on trash and sewage, ground their bodies into chuck, and then sold it all as grade-A ground beef to McDonald’s and Burger King, right under the noses of the USDA. [Securitized subprime mortgages] are exactly the same thing, only with debt instead of food. We’re eating it, they’re counting the money.

Looking for a culprit for today's financial mess? (plus today's oil price roller coaster, plus the '90's Internet stock bubble, plus AIG's black hole for taxpayer dollars -- plus a lot more).

Taibbi makes a damning -- and compelling -- case that Wall Street's fingerprints -- and specifically, Goldman Sachs' --are everywhere.

The piece reads like the stuff of conspiracy novels, which even Taibbi acknowledges at the end.

However, much of what he alleges -- the players, their business practices, the regulations they lobbied for (and thwarted), who profited -- is a matter of public record.

The more I see and read, the more I'm convinced that slow, creeping regulatory capture is the meta-problem at the root of all our other financial problems. Taibbi's piece is Exhibit A.

Read it, and decide for yourself.

"The Scorpion and the Tortoise" defense

Posner: 'Blame Regulators (& Economists)'

Let's place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

--Richard A. Posner, "Capitalism in Crisis"; The Wall Street Journal (5/7/09)

The Wall Street Journal is providing an ongoing platform to Judge Richard Posner, the latest installment of which appears on today's Op-Ed page.

(Sidebar: just like celebrities hit the talk shows to promote their new movies, leading commentators have a way of showing up on Op-Ed pages just as their latest book debuts.)

Posner's thesis: 'you can't blame capitalists for doing what is in capitalists' DNA to do.'

Call it "The Scorpion and the Tortoise" defense.

Notwithstanding the scorpion's promise to the tortoise not to sting it mid-way across the stream, causing them both to drown . . . that's exactly what the scorpion does. Its retort: 'I had no choice. It was in my nature.'

All of which cries out for a two-word rebuttal: 'regulatory capture.'

Here's Wikipedia's definition:

Regulatory capture: a term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating.

All the people -- including Posner -- now calling for tighter regulation of finance are conveniently overlooking one little question: who dismantled all the protections and safeguards enacted after the last systemic crisis, eighty years ago?

Beware the "Financial - Industrial Complex??"

Ironically, Posner, an esteemed law professor and jurist who should know better, makes the classic legal mistake of confusing de jure and de facto causes of what he calls the "Depression of 2008."

(De jure refers to what is technically correct, in a narrow, legal sense; de facto is what's actually true.)

So, the de jure causes of today's mess would be such actions as repealing Glass-Steagall; allowing a handful of investment banks to lever up 40:1; deflecting calls to regulate exotic credit instruments ("collateralized debt obligations?"); failing to act as the credit rating agencies gradually lost their independence -- and credibility, literally; and engaging in overly accommodating monetary policy (again, accommodating whom?).

The de facto cause would be an implicit belief that what's good for Wall Street is good for Washington -- and vice versa.

Assuming there's any difference.

No less than President Eisenhower, leaving office, famously warned of the threat posed by "the military-industrial complex."

He'd likely offer an updated version were he to survey today's business and political environment . . .