Populist Pandering Won't Solve Crisis - Less Regulation Will

By Marc Lichtenfeld

Usually, when I’m watching television open-mouthed and incredulous, it’s because I’ve “accidentally” flipped onto one of those trash-laden, so-called “reality” shows, or because I just witnessed a spectacular sports play.

Well, tack another genre onto the list.

As I watched the proceedings in Congress Wednesday between the U.S. House Financial Services Committee and America’s top bank executives, the smell was pervasive, as it drifted south from Washington, DC to my home on Florida’s east coast.

Let me state for the record that I’m not related to any of “captains of the universe,” nor am I an apologist for the executives, some of whom share responsibility for the economic mess we are currently in.

But I had (naively) hoped that their appearance on Capitol Hill would lead towards some sort of progress in fixing our problems, rather than resulting in a high-profile trip to the principal’s office.

What a dumb idea…

So Much For Obama’s Wish To “Put Away Childish Things”

I knew it was going to be a waste of time when Rep. Michael Capuano of Massachusetts didn’t even bother to ask the executives a question. Rather than probing for information that might be useful, he ranted and raved for five minutes, treating the executives like 2^nd graders who were talking in class.

Representative Maxine Waters of California took over a minute of her time to recite her resume and detail her fights with banks over the years. Congratulations. And when she demanded an answer from the CEOs as to why they took fees in order to collect TARP money from the government, Bank of America (NYSE: BAC) CEO Ken Lewis responded, “I don’t know what you’re talking about.”

The problem is… neither do many members of Congress. And given that these elected officials are charged with getting us out of this mess, that’s worrying - particularly if we’re set for tighter government regulation. If the past 10 or so years have shown us anything, it’s that we don’t have the right people overseeing our financial industry.

In which case I say, we need less regulation, not more. Yes, even today. Let me explain why…

If You Can’t Stand The Heat, Get Out Of The Bank

I’ve got no problem with safety net programs like FDIC or SIPC. Believe me, when Washington Mutual, my own bank, was failing, I was glad we had FDIC insurance to fall back on if necessary.

But to prop up banks like Citigroup (NYSE: C), which might not make it on its own, is an act of futility. The harsh reality of business is that if Citigroup can’t find a way to make money, then it shouldn’t be in business. That’s how capitalism works. If Citigroup or other large banks can’t hack it, I’m sure there are plenty of bright, talented bank executives who will find a way to start new businesses that will succeed.

Same theory applies to the auto industry, too (but don’t get me started on that topic!)

Will it be easy? Of course not. It will create more short-term turmoil. But in the same way as it’s worth some pain and discomfort to undergo surgery to remove a cancerous tumor, it’s also worth avoiding a slow and painful death.

But make no mistake… that’s where we’re headed right now. The American empire is in jeopardy if we don’t rid ourselves of our instant gratification culture and focus on making our world a better place for the long-term.

Something Is Rotten In The State Of The Union

We’re at a pivotal point in our nation’s history.

We can either let free market principles preside. Or we can have a dysfunctional financial structure that is highly regulated by people who don’t have the capacity to understand exactly what it is they’re overseeing.

I’m not trying to say that all members of Congress are buffoons. Most of them are intelligent people. But just because they were successful lawyers, doctors or exterminators doesn’t mean they have the ability to regulate complex financial organizations. Some do. Most don’t.

And when it’s apparent that Congressional leaders care more about “politics as usual” - i.e. scoring short-term points with their constituents, we’ve got a problem. Take North Carolina Representative Walter Jones, for example, when he asked why Citigroup won’t lower its credit card interest rate to 9% for the good of the taxpayer. Um… newsflash, Mr. Jones… wasn’t it the mass availability of easy credit that got us into this mess in the first place? Populist pandering like this means real solutions slip farther out of grasp.

Let The Free Market Reign

Ensuring that the public is treated fairly… that financial terms are clearly disclosed… and that people won’t lose their life savings when they’re trying to be conservative and avoid risk is critical.

But if we want a healthy financial system for the long-term, we need to let market forces work as they have done for decades. Protect consumers from unscrupulous practices, but let businesses succeed or fail based on their own merits, so the cream can rise to the top and ensure opportunity for entrepreneurs who create a better product or service.

The free market system is what helped make America great. It can be once again, but only if we are all up to the task.

Disclosure: no positions

Comments

[morph366:]

In terms of the debate about free markets versus state ownership is that increasingly we are getting the worst aspects of both. When markets are rewarding risk takers the benefits flow to the private sector when risk takers in the banking sector get caught with losses - both realized and unrealized - the public sector gets stuck with the problems.
The statement that you make "let businesses succeed or fail based on their own merits, so the cream can rise to the top" has a nice upbeat flourish to it but at the moment we are more concerned with what happens to businesses where something other than cream - far from rising to the top - has sunk to the bottom and starting to make the place more than a bit smelly.

Feb 15 05:20 AM

[John Petersen:]

Looking for somebody to blame is always easier than admitting "We've seen the enemy and he is us." In the final analysis we all need to wake up in the morning, go to work and solve our problems. Anything that makes individuals accept responsibility for their own choices is good. Anything that lets me blame somebody else for my problems is bad. Let's work for the good.

Feb 15 05:28 AM

[bosun.j:]

The Author wrote: "The American empire is in jeopardy if we don’t rid ourselves of our instant gratification culture and focus on making our world a better place for the long-term.

AND

We can either let free market principles preside. Or we can have a dysfunctional financial structure that is highly regulated by people who don’t have the capacity to understand exactly what it is they’re overseeing."

Therein lies the elemental bankruptcy of the "free market" mantra.

On the one hand these guys give lip service to "making our world a better place for the long-term" and without taking a breath they beat their fist and demand an absence of regulation.

In reality they want an unfettered ability to make money however they can.

"Making our world a better place for the long-term" to these guys is just more IGMFU nonsense.

"Making our world a better place for the long-term" means no longer measuring value of people in dollars and cents.

Feb 15 05:51 AM

[bosun.j:]

The Author wrote: "The American empire is in jeopardy if we don’t..............(fi... in the blank)"

"from Latin imperium absolute authority, empire, from imperare to command" Mirriam Webster's

Therein lies one of many major problems with how Americans view themselves and the 95% of those lucky enough not to be American. Empire my sticky rice!

Hello! The American "Empire" is in jeopardy no matter what.

Nothing can be done to prevent its fall. Nothing. America pissed away its "empire" all by itself through the embrace of extremist-capitalist neo-CON ideals.

Congratulations! You made it!

Feb 15 08:28 AM

[john s. gordon:]

absence of regulation is what got us into this mess.

restore the uptick rule.

restore glass-steagal.

eliminate 33/1 leverage on commodity furtures.
> jack

Feb 15 09:09 AM

[russ:]

As to 'buffons' the author is example # 1. We have seen what happens when we let a few put their self-centered views of their ability ahead of restraint and common sense, we get a near collapse of the banking system. I am tired of arrogant ideologues who ignore the facts and approach every event as if goofy theories are more important that reality.

Feb 15 09:30 AM

[tdillian:]

good article...

"We can either let free market principles preside. Or we can have a dysfunctional financial structure that is highly regulated by people who don’t have the capacity to understand exactly what it is they’re overseeing.
"

yep... that basically describes what I was feeling watching those idiots ask the bank ceo's questions.. I turned it off after 5 minutes.. if I wanna watch entertainment, I'd rather watch a show where at least I am not paying their salaries.

Feb 15 11:00 AM

[henarl:]

Pot - Kettle. Both black.

Feb 15 12:34 PM

[Bundee:]

So the author's point is
"Less regulation good, more regulation bad"-
The last administration adhered to the idea of 'leave the markets alone they will take care of themselves'
-that sure worked out great, didn't it?

Where were the regulators OR congress when the house appraisers were complaining to congress of all the underhanded things going on (if house appraisers didn't make the numbers work, real estate agents would blacklist them from future appraisals)

How about Mr. Harry Marcopolous providing evidence to the SEC for Ten Years that something was wrong wth Madoff's investments, yet nothing was done.

The qunatity and quality of regulation was lacking in both cases.

We don't need fewer regulations or fewer regulators, we need regulators to actually get the job done, make the tough call, stop the bad players from wrecking the market and end up scaring away investors from the market for years or decades.

Lastly, if he really believed in free market capitalism he whould call for the abolisment of the FDIC like many free market capitalists do.
Why reward bad banks by protecting them through the FDIC? Let them fall and make room for newer, better banks.
'You invest your money you take your chances' is the motto of free market capitalism, something this author seems to have forgotten, overlooked or ignored.

(I am not against the FDIC myself, if it didn't exist I wouldn't have anymoney in any bank, and no, I'm not a free market capitalist.)

Feb 15 12:52 PM

[jksisco:]

How many regulators will it take to actually regulate everything that needs, should, or, has been regulated? When regulations are passed isn't there always a loophole somewhere? The FDIC doesn't have enough capital to insure every deposit in this country, so, it either a ponzi scheme like Social Security, or, it is just window dressing to make joe and jane everyman feel good. I'm sooo fed up with congressional committee dog and pony shows that always occur after the fact and only result in more dog and pony shows. If you're worried if your money will be safe in a bank, investment or what not, then, do your due diligence, ask for the profit and loss statement, the balance sheet, etc, and then keep your fingers crossed, because even with all the regulation in the world, a crook is a crook. The reason regulation is enacted is to protect people who are too lazy to investigate or whine to holy heaven because they were too lazy to investigate. Either your a victim, like to be victimized or want someone to victimize on your behalf, take responsibility for your own actions and learn from your mistakes, then move on. Don't vote for more regulation because it feels good, it just takes Liberty from all and very,very rarely does what it was intended to do.

Feb 15 01:45 PM

[i_care:]

So let me see if I got it right.

The author's solution is to be consistent and 'stay the course' by continuing the Clinton& Bush policy of deregulation. Let's let Cirtibank, GM and all the others collapse and let unbridled capitalism reign. It is indeed appealing to let all the clowns who brought us here fail. The question is what would be the consequences for all of us. In 1929 it brought us WWII. What would it bring us today? We don't know and I am not sure we want to find out.


On Feb 15 05:20 AM morph366 wrote:

> In terms of the debate about free markets versus state ownership
> is that increasingly we are getting the worst aspects of both. When
> markets are rewarding risk takers the benefits flow to the private
> sector when risk takers in the banking sector get caught with losses
> - both realized and unrealized - the public sector gets stuck with
> the problems.
> The statement that you make "let businesses succeed or fail based
> on their own merits, so the cream can rise to the top" has a nice
> upbeat flourish to it but at the moment we are more concerned with
> what happens to businesses where something other than cream - far
> from rising to the top - has sunk to the bottom and starting to make
> the place more than a bit smelly.

Feb 15 02:14 PM

[Allamad:]

Your enemy is not al-Queda it's your own government. Long before the terrorists come on shore and take your property and convert your children, your government will bankrupt you. Republicans and democrats, liberals and conservatives, they all line their own pockets first (free health care for life, incredible perks and lifetime pensions after only two years in office). Raise your children to get government jobs as the country moves toward full socialism and away from free markets. Those will be the only jobs offering lifetime employment and inflation adjusted pay in the future.

Feb 15 03:16 PM

[joes:]

Populist Pandering as the author calls it is a typical step in the cycle of corruption that happens every time some free market Reagan worshipping idiot starts to tell us how well deregulation worked for us in the past, even though by my recollection over the past 50 years Adam Smith's invisible hand is found in the cookie jar a couple of times every decade.

We clearly need more onerous penalties for white collar crime, a new type of Rockefeller Law that sends anyone found guilty of financial crimes up the river for 20 years.

Maybe the temptation to have a bigger house than the guy next store won't be so appealing if the risk is a long trip to the big house.

Crimes need to be punished and enforcing laws to rid the streets of gangsters like John Thains, Alan Greenspans and Bernard Madoff will make the world a safer place to invest and save.

Feb 15 04:35 PM

[Jim Fitzsim...:]

Good response!
I get so tired of plutocratic wannabes bitching about "populism.''
It would be so satisfying and entertaining to see a few clever federal prosecutors RICO Thain and his fellow investment bankster's assets to the point where, after indictment, they had to rely on public defenders.

15 04:35 PM joes wrote:

> Populist Pandering as the author calls it is a typical step in the
> cycle of corruption that happens every time some free market Reagan
> worshipping idiot starts to tell us how well deregulation worked
> for us in the past, even though by my recollection over the past
> 50 years Adam Smith's invisible hand is found in the cookie jar a
> couple of times every decade.
>
> We clearly need more onerous penalties for white collar crime, a
> new type of Rockefeller Law that sends anyone found guilty of financial
> crimes up the river for 20 years.
>
> Maybe the temptation to have a bigger house than the guy next store
> won't be so appealing if the risk is a long trip to the big house.
>
>
> Crimes need to be punished and enforcing laws to rid the streets
> of gangsters like John Thains, Alan Greenspans and Bernard Madoff
> will make the world a safer place to invest and save.

Feb 15 07:23 PM

[J. B. Wulff:]

One of the better reviews I've seen. The idiots in Congress who rise to committee chairman based on senority does prove the Peter Principle. Chris Dodd and Barney Frank are poster boys for this. "Too big to fail" also messes things up. Enforcement of the laws, regulation, etc. is also overdue. We don't need more of them. Mocking business leaders on TV for the dolts back home is also sad. A quarter of one billion dollars was spent by the campaign and inaugaration of Obama, all for a job that pays less than a million a year unless you include the house and the plane. Business leaders should journey to Congressional hearings via Amtrak rather than corporate jets? There is some value to their time and company planes display that value. If it's all about expense of travel, perhaps all, including Congress members should hitchhike. Hawaii's could use a row boat.

Feb 15 09:03 PM

[biomedlives:]

"Lastly, if he really believed in free market capitalism he whould call for the abolisment of the FDIC like many free market capitalists do.
Why reward bad banks by protecting them through the FDIC? Let them fall and make room for newer, better banks."

AMEN. If you want federal deposit insurance, your bank will have to accept regulatory limitations on doing any d__n fool thing (credit default swaps, negative amortization loans, mortgage backed securities) it wants to do.


On Feb 15 12:52 PM Bundee wrote:

> So the author's point is
> "Less regulation good, more regulation bad"-
> The last administration adhered to the idea of 'leave the markets
> alone they will take care of themselves'
> -that sure worked out great, didn't it?
>
> Where were the regulators OR congress when the house appraisers were
> complaining to congress of all the underhanded things going on (if
> house appraisers didn't make the numbers work, real estate agents
> would blacklist them from future appraisals)
>
> How about Mr. Harry Marcopolous providing evidence to the SEC for
> Ten Years that something was wrong wth Madoff's investments, yet
> nothing was done.
>
> The qunatity and quality of regulation was lacking in both cases.

>
>
> We don't need fewer regulations or fewer regulators, we need regulators
> to actually get the job done, make the tough call, stop the bad players
> from wrecking the market and end up scaring away investors from the
> market for years or decades.
>
> Lastly, if he really believed in free market capitalism he whould
> call for the abolisment of the FDIC like many free market capitalists
> do.
> Why reward bad banks by protecting them through the FDIC? Let them
> fall and make room for newer, better banks.
> 'You invest your money you take your chances' is the motto of free
> market capitalism, something this author seems to have forgotten,
> overlooked or ignored.
>
> (I am not against the FDIC myself, if it didn't exist I wouldn't
> have anymoney in any bank, and no, I'm not a free market capitalist.)

Feb 15 10:15 PM

[mediapro:]

"We can either let free market principles preside. Or we can have a dysfunctional financial structure that is highly regulated by people who don’t have the capacity to understand exactly what it is they’re overseeing."

If a I read your critique and world view correctly, then offered the alternatives, please allow me to experience the possibility that "free marketers", as you claim to be, can descend into the depths of your ignorance and be silent for a while.

If your memory is fuzzy on the path we've travelled since 1980, let me remind you:

Flash back to the neo-con's answer to 1970's stagflation and Milton Friedman's Shock Economics Theory he plied so well in South America for right wing fascists.

Roll tape a bit forward to the Gipper. Cut taxes, spend on defense out the wazoo, run record deficits, de-regulate markets and watch Uncle Milties' magic work.

While every right wing neo-con tape loop is buzzing with out-of-control GSEs, we all seem to conveniently ignore how all of this silly and frightening theoretical economic approach played out around the world through the likes of the IMF, World Bank, Halliburton, and their ilk.

Look at any country where this supply-side, trickle down, deregulated gambit has played and look at how eeiry is the similarity between those countries and this one:

1. The top 1% control 40% of all financial wealth in the U.S. The top 20% another 52%, leaving the rest of us (80%) America's financial wealth at a whopping 8%.

2. In terms of inherited wealth only 1.6% inherit more than $100,000. 91.9% receive nothing. Yet the "death tax" was/is the highest priority on the ultra-conservative agenda.

Now for some sobering reminders:

Under Clinton we enjoyed a $287 Billion SURPLUS that's now an ever-growing DEFICIT that at last peek was nearing $1.4 Trillion and national debt that has grown from $5.7 Trillion to $10.2 Trillion in just seven years.

It wasn't because Clinton was an economic genious. He simply returned out-of-control revenue reduction (tax cuts) back to the Reagan rates and chose folks who shared his philosophy of government and its role. I'll put my money in the hands of the guys that believe that it's the government's job to invest in the 80% of us that need practical ways to grow our own wealth (smart energy policy, infrastructure development, education).


As for the free market to right the ship?

Feb 16 04:06 AM