More Regulation?

The G-20 meetings that were held in London this past week resulted in President Obama agreeing to follow France's President, Nicolas Sarcozy, plan to regulate more tightly the once free markets.  Obama also pledged to repudiate U.S. policies towards freeing markets from excessive government interference.  The President's promises at the G-20 essentially reversed 25 years of free market policy spanning Presidents from both parties that ushered in  the largest growth in American wealth in history. 

The problem we are in today has little to do with lack of regulation and has everything to do with a) failing to enforce the regulations we have on the books; and b) sheltering risk takers from the consequences of their actions.  Many of the problems we have could have been prevented simply by enforcing the laws on our books.  If we don't enforce our laws, including punishing people for acts of fraud, we encourage people and entities to push the boundaries of what is acceptable.  Indeed, all laws, customs, mores, and social conventions are fluid concepts that derive from expansion of boundaries of what was once acceptable.  Laws and regulations are in place to put absolute limits on the extent to which these social conventions may be pushed.  Regulations as to capital ratios, executive compensation, and other minutiae on the day to day runnings of business have no place in our society.  The world is complex; businesses are complex.  One government solution does not fit all, nor should it.  No one wants a policy wonk sitting in a government building in Washington DC telling businesses in New York, San Francisco, Boston or elsewhere what ratios, salaries, employees they should have.  What is important is transparency and uniform standards of disclosure, not how the task is accomplished.  Essentially, we want transactions to be free from fraud and the best way to accomplish that is through transparency and mandatory disclosure.  In this day and age with modern communications and powerful computers, there is no reason that we can't have monthly reporting (or even weekly) rather than relying on quarterly disclosures.

The flip side of transparency, however, is another key area that we seemed to have forgotten.  That is, allowing the consequences of risk to fall upon the party assuming the risk.  Risk is a 4-letter word after all.  Not only is there an upside reward if the risk pays off, but there has to be a downside consequence when the risk doesn't pay off.  Spreading the risk among innocent parties (taxpayers in the case of the recent government bailouts) encourages riskier conduct than would normally be taken.  If risk is taken knowing that 100% of the upside is yours, but there is little  penalty on the downside, undisciplined risk will be assumed.  Bankruptcy has to be a viable option for every entity.  There can be no such thing as too big to fail.  The only role of government should be the orderly winding down of large institutions that have failed.    If we choose to insure bank deposits, the risk premiums paid by banks to the FDIC need to be set based on the risk undertaken by the bank, not a uniform premium across all banks.  Conservative banks that make solid loans in accordance with well established underwriting guidelines should be rewarded with lower premium and the ability to pass savings onto their constituencies.  Conversely, banks that take excessive risk need to pay a higher price because it will be more likely that taxpayer dollars will be needed to pay off depositors.  

Bankruptcy needs to be a viable option.  In many instances, it helps restructure loans.  It clears dead weight off the necks of individuals and businesses and allows them to once again become productive.  A few years ago we  changed our bankruptcy laws to make it more difficult for individuals to discharge credit card and other consumer debts in bankruptcy.   We need to revisit the wisdom of making it more difficult to restructure individual debt while at the same time allowing corporations to avoid bankruptcy.  While I have little sympathy for the individual that incurred debt beyond their means, the risk of that loss must be shared with the counter party lender that took the risk to allow the person to incur debt that couldn't be repaid. Without risk, the same practices that brought our economy to the brink of collapse will repeat and collapse will be inevitable.  

Choking the businesses with excessive regulation will not bring us out of this great depression 2.0, but enforcing laws to bring transparency to transactions and allow the consequences of risk to fall upon the risk taker will be a start to righting the ship.

Government Policy Summed Up

The Wizard of Id has managed to succintly summarize our Government's policy towards troubled businesses.  Here is the comic in full:   

More Government Waste with No Bid Contracts

Earlier this month, President Obama brought John McCain to the White House to announce a restructuring of the way the US government procures goods and services.   In particular, the Obama administration claimed to limit the practice of using no-bid contracts.  No bid contracts are uncompetitive and result in higher payments for fungible goods and services.  

Within a few days after the words of eliminating no bid contracts left the President’s mouth, his Treasury Secretary, Tim Geithner, sought to procure for the US Treasury a supply of notebook computers.  Here is the announcement.    The procurement goes through great detail specifying the performance of the computers, what types of drives and memory, the operating system, etc.  It goes on to specify that in fact what the Treasury needs is Dell computers.  Yup, this  "competitive bid", can be filled only by a single source - Dell Computer!  Still, it is put out to bid.  I wonder how many competitive bids the Treasury will get from say HP, IBM, Acer, Gateway or other computer manufacturers?  This is simply more evidence that when Obama speaks he means the opposite of what most people understand his words to mean.  

Congress and Obama Knew About AIG Bonuses

One thing that has been, and is still, a certainty is that when any government politician says something we know the opposite is true.  The furor over the AIG bonuses is a prime example.   (see AIG Bonus Firestorm Misdirection - Updated and AIG Bonus Firestorm Misdirects Attention Away From CDS Payments for prior discussion.)  We now know that President Obama knew about the amount of the AIG bonuses on Thursday March 12 - several days before his "impromptu" expression of outrage.  

The real outrage, however, is that we now learn that Obama's treasury secretary, Timothy Geitner, not only knew about the bonuses in advance, but with Connecticut Senator Christopher Dodd's assistance, inserted a provision in the $400+ billion spending bill that preserved AIG's bonuses.  In a New York Times article on the fallout affecting Senator Dodd, Geitner takes the blame for protecting the bonuses:

On Thursday, Treasury Secretary Timothy F. Geithner came to Mr. Dodd’s defense, saying in an interview with CNN that his staff had raised concerns about whether the legislation limiting executive compensation “was vulnerable to legal challenge.”

Dodd - the chair of the Senate Banking Committee and person responsible for the portion of the legislation providing the loophole, was not forthcoming about his involvement.  The NYT article went on

This week’s uproar was triggered largely by Mr. Dodd himself, when he provided conflicting answers about the provision that allowed the bonuses at A.I.G. According to the Center for Responsive Politics, the company’s employees, political action committees and subsidiaries have made campaign contributions of nearly $300,000 to Mr. Dodd since 1989.

Initially, Mr. Dodd said he did not know how the loophole got into the legislation that sought to crack down on executive compensation. But then in an interview Wednesday with CNN, he acknowledged that his staff helped write the revisions after receiving a request from the Treasury Department.

Aside from the asinine attempts at covering up what was done, the question we should be asking is why did NONE of the 534 other elected officials raise any concern about this provision?  The answer is pretty clear - the $787 Billion stimulus bill was rushed through Congress, and the controlling parties would not let a full debate come to the floor.  Provisions were  inserted in backroom meetings and both houses were given a mere 24 hours to pass the bill.  No debate was allowed.  That, my friends is not how democracy is supposed to work.

The reason this happened is that our elected Senators and Representatives failed to perform their job.  It is their job to represent us and debate the legislation.  I am very skeptical whether any of the 435 Representatives or 100 Senators even read the full bill before it was voted upon.  America, we were cheated.  Our elected officials are no better than the greedy bastards that took the bailout money and lined their own pockets.  In fact, it is worse.  It is nothing short of a breach of trust.  

We need and deserve better representation.  Ask your congressman why he or she voted for a stimulus bill that allowed recipients of federal money to pay huge bonuses?  Listen to what they say and ask them if they personally read the 1000 page bill before they voted on it.  If they told you they did, they are lying.  If they admit they did not, ask them to step down.  It is time that we either throw all the bums out of Congress.  At the very least, we need to make sure that our representatives are effective and that we have a voice.  Consider insisting on our Constitutional right to have one representative for every 30,000 inhabitants (see, Taxation With Representation Is Not So Good Either.)   With more members of Congress, we the people will have more control and the elected officials, individually, will be less powerful, albeit collectively we will all be more powerful.  If none of the 535 members had the foresight or fortitude to question the $787 Billion dollar spending bill, then maybe, just maybe increasing the size of the representatives to 2500 would produce one or two who would stand up for what is right.  It is time to act now before it is too late.