Perhaps the most perplexing issue in politics today is financial reform. On its face, “reforming” our nation’s financial markets is as close to a universally popular measure as any domestic item gets. Democrats, Libertarians, and Tea Party Conservatives all want to see something done. All of the above were/are outraged by the bailouts, and all, for the most part, agree that greed and corruption are the roots of the problem.
The difficulty for we the people lies in the following fact; Democrats, Libertarians, and Tea Party Conservatives hate to agree on anything. We have come to a point in our democracy where the notion of acknowledging and building on common ground is considered to be akin to a sin. Compromise has become a dirty word, compared to appeasement with the Nazis and negotiating with terrorists. We Americans, all of us (including yours truly), are guilty of turning our back on well made points for the sake of winning an argument. I propose that we adopt this issue as the fulcrum for changing the paradigm.
What follows is an outline of the major complaints made against the financial system by the various groups. Where the complaints cross all of the groups, we will find opportunities to draft legislation that appeals to the majority; this is because such legislation will respect the needs of the majority. I will begin the process by listing the “actors” in this play, and provide some brief explanation of the timeline.
The Who’s Who
- Alan Greenspan/Ayn Rand: Greenspan is the well-known former chairman of the Fed, appointed originally by President Reagan. Ayn Rand was a philospher who championed the notion that markets can control themselves; Greenspan considered himself a Rand disciple. Greenspan enforced the letter of the law when he had to, but let regulatory responsibilities languish.
- Fannie and Freddie: The principal components of the “secondary market”, these institutions were created by the federal government and later privatized. Their function was to provide liquidity in the mortgage market….if your local bank has all of its money in local 30 year mortgages, it would be like you having your entire retirement fund in one company’s stock (i.e. dangerous and tough to sell if things go south). Fannie and Freddie created instruments (derivatives) crafted from a variety of markets and mortgage types and sold them. Banks could reinvest money back into local lending in greater security. (By the way…it is actually a solid idea)
- Bill Clinton/George W. Bush: Clinton wanted to boost home ownership, Bush wanted to take the cuffs off of business, both let regulatory issues and oversight slide. Clinton appointed freewheeling market money gurus to Fannie and Freddie, the Fed, and the Treasury and let them run. Bush further relaxed oversight standards and let things stew until long after it was clear action needed to be taken.
- Phil Gramm: Senator and major recipient of funds from banking giant UBS. With an honorable mention to his wife, an Enron exec, Senator Gramm pushed the gutting of the Glass-Steagall Act which kept investment banks, commercial banks, and insurance companies from mixing. He later added to his mystique by blocking an effort made by the Bush Administration that would have compelled banks to freeze assets and disclose paper trails in terrorist investigations after 9/11.
- The Fed: The nation’s central bank; its responsibilities include maintaining stable macroeconomic conditions (i.e making sure that inflation and interest rates stay moderate), ensuring the safety and security of the nation’s banks, and providing financial services to the U.S. government and its member banks.
What People Hate
- Libertarians, along with a fair percentage of other folks, hate the Fed. Ron Paul leads a movement that is trying to kill the institution.
- Liberals, as a core belief, and Populists, as a visceral response, hate the big money investment banks. Both believe they should be punished and restrained, although Populists dislike government intervention with the same passion as that which they reserve for the money men.
- Tea Party Conservatives, along with rank and file Republicans, hate spending tax dollars to prop up the system. They share this belief with most Americans despite their protests to the contrary.
- Folks trained in business, finance, or economics hate the general lack of understanding by the American people about the system. The American people reciprocate by despising the trained folks for being so “smart” and still managing to screw up the economy.
- Americans hate the Congress and White House for being so thouroughly connected (via the pocketbook) to big money interests. Democrats and Republicans have taken turns pointing fingers at each other, but the average American knows that ALL of them get big money from the creeps on the Street.
What To Do
- Do not abolish the Fed, and do not add more oversight from the Congress. I know, I know…the Fed dropped the ball, and perhaps they get too cosy with Wall Street, but the existing processes in place are sufficient if they are enforced. The Fed is supposed to stay somewhat disconnected from Congress in order to stay above the fray. There is no mechanism in the market that can do what the Fed does. With respect to Ron Paul, abolishing the Fed is like outlawing vaccines; the side effects you may prevent now are nothing like the diseases you will allow to spread later.
- Do not create a consumer credit protection agency. This is a well-meaning attempt at regulation by old-school Democrats. It is called the old-school for a reason….it doesn’t work anymore! The system needs easy to enforce, broad-spectrum rules that allow individual firms to get in trouble if they wish, but keep problems from threatening the whole.
- Outlaw dumb stuff…what does that mean? It means use common sense. Does it make sense to let someone buy insurance on something they don’t have an actual stake in? No! So the credit default swaps, as clever as they might be, are just stupid. Providing liquidity is good, but providing liquidity without limitation is dumb stuff.
- Force institutions to be accountable. Do not allow credit cards, car loans, or student loans to be sold on the secondary market. This will limit the available capital to those markets, but sacrifices have to be made. Do not allow institutions, banks or otherwise, to sell mortgages to the secondary market without full documentation and equity/mortgage insurance equaling 100% of the apprasied value. Do not make this a regulatory requirement, make it a criminal act. Participate in such a fraud, knowingly or not, and be charged with felony fraud. Allow an environment in a firm to be conducive to such fraud, and be charged with racketeering.
- Reset the tax and regulatory environment to favor locally owned banks and credit unions. Let the market force the deconsolidation of the banking industry, and we won’t have to go through a major rewrite of financial law.
Well, I am ready to hear alternatives, so fire away!
The Rational Middle is listening…