September 23, 2008

The problem with deregulation

Posted in 2008 Elections, Rove and Rovian attack politics, U.S. Economy tagged , , , , , , , , , at 3:04 am by realitytax

Even if the Department of the Treasury recovers some the Wall Street bailout funds over time, the idea of spending perhaps $700 billion or more on top of our current national deficit is mind-boggling. Can somebody justify for me why countless families are losing their homes while executives at these “failed” and restructured corporations earned hundreds of millions of dollars but aren’t being asked to return any of it? Can you tell me?

Professor Roy GrowI heard an analogy from Professor Roy Grow, the Frank B. Kellogg Professor of International Relations in the Carleton College‘s Department of Political Science, to help you think about what’s set up the crisis on Wall Street. The international relations program was originated in 1937 by former Secretary of State and Nobel Peace Prize winner, Frank B. Kellogg, through the establishment at Carleton of the Kellogg Foundation for Education in International Relations.

I’ll paraphrase Professor Grow’s dialectical discussion:

Imagine you’ve got ten large, healthy, competitive men gathered together. Set the task for them: win a game of basketball. They’ve all played basketball before. In fact, they’re quite good at it. But this isn’t college, with some fans of both teams cheering them on, there won’t even be a referee to call fouls or out-of-bounds. All the rules they’ve dealt with learning the game? Effectively gone, because you’ve deregulated the game.

Who will win?

Why?

There’s a fundamental problem with deregulation of the kind – and scope – that has taken place on Wall Street. Once there’s no reward for playing by mutually agreeable rules the ONLY reward is winning – at any cost. The value of deregulation seemed so great: let free markets determine what’s best; let competition determine the practices without the restricting burden of oversight.

In what other industry would you have confidence enough to let the people with the most to gain act without regulation? Would car companies be so concerned with passenger safety without regulation? Would you want doctors to practice unregulated- no assurance they’d act with YOUR best interest in mind? Lawyers? Accountants? Toy Manufacturers? Food processors? I’m not suggesting there’s nothing good about a free-market economy, nor am I suggesting every insurance company or investment firm is run by greedy executives, but there have been snake-oil salesmen preying upon the unwary since before the dawn of history as nearly as I can determine.

At one time we might have run such fast talkers out of town, or even applied tar and feathers, or worse. The notion that we’d let them leave smiling, with everything they’d pilfered intact, on their own schedule and terms? That, my friends, is a farce.

We’ve got a big problem. We’ve left foxes guarding the chicken coop. To borrow a phrase freighted with partisan overtones, we need to be “as careful getting out as we were careless getting in…” to this mess. I don’t pretend to know what the solution is; economics is not my forte, nor that of most of my close associates. I do know this: hasty proposals abound in any perceived crisis, but unless you’ve already been expecting the problem and have a plan in place taking time to consider several reasoned solutions often yields superior outcomes to adopting either the first idea or the one advanced by the loudest voice.

I’m disappointed, but not surprised, that some have tried to use the crisis for their own political and/or financial gain. That confirms the readiness of snake-oil salesmen and their ilk to exploit any suffering for their own personal advancement, and demonstrates one peril of trusting the lofty ideal of a free-market to work to everyone’s mutual benefit in the never-ideal real world.

Given that it’s tax dollars about to be put to use to repair the damage, given the complexity of the system(s), and balancing that complexity against the obvious repercussions to inaction, I hope a transparent set of priorities will allow wiser men than me to conceive and begin to implement the kind of oversight that has obviously been missing from this segment of the economy for years.

Given, lastly, that Senator Barack Obama had the foresight to write publicly to both Fed Chairmen Bernanke and Treasury Secretary Paulson about his concerns over looming repercussions from the questionable lending practices at the foundation of this crisis in March of 2007: Obama’s got both the fundamental familiarity and the network of advisors to facilitate identifying fiscal policy changes that should be on the table. It’s unfortunate that such an exercise would likely disrupt Obama’s presidential campaign, but he and his team have already given the problem serious thought; they must be included in the process.

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10 Comments »

  1. jayfulton said,

    I agree. Would you be so kind as to take 1 minute to click through a one question poll about deregulation? if yes, thank you!

    http://jayfulton.wordpress.com/2008/09/27/please-take-this-poll-about-deregulation/

  2. […] we focus on the issues important to the voters – the economic bailout being considered by congress, deregulation, Iraq, taxes, and health care to name a few obvious issues more important than the fact a […]

  3. […] Palin essentially ignored the question altogether to assert that McCain, who had championed Wall Street deregulation, nonetheless had warned people “two years ago” that something bad might be […]

  4. We’ve seen the downside of that risky approach.  McCain, who championed deregulation in the stock markets, thinks the health care insurance industry should be similarly allowed to regulate itself – what’s next? Unlicensed plumbers?

  5. […] you. OK, technically my boss isn’t running a licensed plumbing company either, but all that regulation isn’t really necessary, is it?  I mean, sure, a bit of regulation might have helped prevent the need to bailout the rich guys […]

  6. […] we have no choice in the midst of the crisis, brought on by years of deregulation and under-regulation on Wall Street and throughout the financial industries, other than to radically re-engineer the […]

  7. Average weekly earnings, which had fallen in June, did rebound during July  to the level they had been at in May of this year. The small ERRI gain shows Wall Street’s optimism hasn’t yet reached most other streets; it will take some time for average Americans to feel – or believe – that the no-longer subtle fallout that started with obscure financial “devices” has eased — that the nightmare of rampant foreclosures has abated and real recovery has begun. The problem, we know now, was not just credit default swaps, let alone sub-prime lending which can and does help people who need credit, but rather aggressive and deliberately predatory sub-prime lending from companies and CEOs who operated as though they were immune to the risks due to an essentially unregulated environment.

  8. The GOP often seemed one solid, united front of like-minded folks. Built around a core of old-money, anti-regulation businessmen that, at times, has held its collective fiscally conservative nose to take advantage of single-issue voters.

  9. […] example of why they cannot be expected to function for the good of the consumers when government fails to regulate those with the profit […]

  10. […] seen what happens on Wall Street without adequate oversight and regulation(s): the markets crashed, foreclosures destroyed home values, the economy went into a tail-spin. As if […]


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