Congress: Financial Amateurs at Work

By James Kwak

Last month, Representative John Shimkus spoke out against regulating carbon dioxide emissions on the grounds that carbon dioxide is plant food. “So if we decrease the use of carbon dioxide, are we not taking away plant food from the atmosphere?” Shimkus is on the House Subcommittee on Energy and Environment, which means he has a vote on these issues.

In the wake of a financial and economic crisis of at least generational magnitude, our government will be rewriting the rules of the financial industry. And “our government” includes not just the pedigreed scholars in the executive branch (Larry Summers, Christina Romer, Austan Goolsbee, etc.), but Congressional representatives like John Shimkus - “like” in the sense that they were selected for their jobs, and for their committee seats, in exactly the same way that Shimkus ended up discussing the crucial role of fossil fuels in sustaining plant life on this planet. And when it comes to legislation, Summers, Romer, and Goolsbee have exactly zero votes between them; Shimkus has one.

Planet Money had an interesting interview a while back with John Campbell, one of those people on the House Financial Services Committee. Campbell reminded me of a college student who’s about to take a really hard math class, and knows he isn’t a math whiz, but is fairly confident that if he studies hard he can probably figure out enough to do a decent job.

I’m not sure even in my own mind - if I were king - I’m not sure what I would do at this point and I don’t think I’m alone in that viewpoint. This stuff is not easy; there are a number of different alternatives, a number of different thoughts on how to do it. . . .

One of the debates . . . is if it’s too big to fail, can it be regulated enough that it won’t fail. Maybe. I’m not sure. . . .

To me, it’s an intellectual exercise, too, which I find very fascinating, and it’s a problem-solving exercise, which I’ve always liked to do . . . I was in business. I was essentially a startup and turnaround guy. I went into businesses that were in trouble and tried to figure out how to turn them around. And so right now we now have an economy in trouble, and this is a little bit the same sort of thing on a much bigger scale. [Laughter.]

The first time I heard that interview, I was terrified.

Now I don’t mean to be hard on Campbell. Few people sound as smart on a microphone as they do with the benefit of reflection and the backspace key (the writer’s best friend), and to some extent he’s just saying he has an open mind, which is a good thing. I didn’t find Campbell particularly insightful, or particularly dumb. He just seemed like a normal, well-meaning, earnest guy.

But on reflection, maybe that’s the way it should be. When it comes to our representatives, the point of our particular kind of democratic system isn’t to select for expertise, or intelligence, or ability to understand policy issues. If it were, we should all be profoundly depressed, because it has obviously failed. The point is to ensure accountability, which means that the people making decisions have to answer to someone.

What alternative is there for redesigning our financial system? Imagine you instead entrusted the job to some committee of professional economists from Harvard, MIT, and all those other fancy places. How would you decide who would be on the committee? And do you really want a bunch of economists? Some people would want to include people from Wall Street; others would want to include people from other disciplines, like psychology and political science and history; others would want to include people from Main Street. Any group you managed to convene would be assaulted with charges of bias. And anyone who didn’t like the outcome would claim he wasn’t bound by its ultimate decisions.

Expert commissions have to have their work approved by Congress before it becomes law, because Congress, for all its imperfections, is the tool we’ve got for ensuring accountability and thereby creating political legitimacy. Which brings us back to John Campbell.

First, Congressmen do have staffers, many of whom are very knowledgeable about their areas of expertise, particularly when you get to the committee chairmen. They are getting all sorts of intellectually reputable input - from the executive department, from hearings, from think tanks, from the newspapers, and maybe even from the Internet. They are also getting input from their constituents, who presumably are representing their own legitimate interests. (Let’s pretend we don’t have problems of false consciousness for a moment so I can avoid a huge tangent.) At the same time, however, they are also getting input from lobbyists and major campaign contributors. Ideally, we want them to make decisions that are in the best interests of their constituents and the country as a whole (probably in that order).

Ultimately, I think this means two things. First, the policy discourse - even when it deals with something complex like systemic financial regulation - has to be conducted in terms that a non-specialist Congressman can understand. Second, the process by which Congressmen gather information and make decisions has to be as transparent as possible. A policy debate conducted in the open, where the public understands the issues at stake and understands who is voting for which position and why, should be one where it is harder to reward major donors and special interests.

For the opposite, we need look no further than the Commodity Futures Modernization Act of 2000 - passed, unread by anyone except the lobbyists who drafted it, in the dying moments of the Clinton administration. And that bill was even sponsored by Phil Gramm, a onetime economics professor.

This is how I learned to live with John Campbell. This isn’t particularly insightful to anyone who’s thought about representative democracy, and I’m sure some of our readers will find it painfully naive. But I like to think that maybe there are people on the House Financial Services Committee who are secretly not so sure about the difference between preferred and common stock, and maybe they will read Financial Services for Beginners, and maybe that will help them understand what’s at stake so they can make an informed decision rather than just voting the way the lobbyists want them to vote.

Comments

[Larrysyr:]

Winston Churchill said it best:

"Democracy is the worst form of government, except for all those others."

Apr 20 10:05 AM

[CautiousInv...:]

First, the policy discourse - even when it deals with something complex like systemic financial regulation - has to be conducted in terms that a non-specialist Congressman can understand. Second, the process by which Congressmen gather information and make decisions has to be as transparent as possible. A policy debate conducted in the open, where the public understands the issues at stake and understands who is voting for which position and why, should be one where it is harder to reward major donors and special interests.

----------------------...

That remarks reminds very much of recent discussion on financial innovation and what went wrong. And it is precisely understanding what went wrong that should guide financial reform. The reform process should be the mirror image of the financial innovation that got us into this mess. That suggests that everything be out in the open, the process conducted in language understood by all and that we fully grasp ALL of the consequences of our attempts to reform the financial system. And this should be done while leaving room for financial innovation that is truely productive and does not lead to excessive leverage or unknown risk.

Apr 20 10:15 AM

[john s. gordon:]

'anyone who didn't like the outcome (of the 2008 election for example?) would claim that he wasn't bound by its ultimate decision'...
sounds like the present governor of TX.
> jack

Apr 20 10:31 AM

[zorkfin:]

"And “our government” includes not just the pedigreed scholars in the executive branch (Larry Summers, Christina Romer, Austan Goolsbee"

I am not at all impressed with any solution coming out of this pedigreed scholars. In what regards Goolsbee I see him more of a pedigreed political commisar. It is not difficult to imagine an average layman doing at least as well.

Apr 20 12:14 PM

[Hot Richard:]

I'm shorting everything dollar and US-based, so I am COUNTING on the amateurs in Congress/Executive/Fed to do a completely amateur job.

If you know a massive FAIL is coming, you should be able to get rich. I'll deal with the guilt issues later...from one of my gold toilets!

Apr 20 01:21 PM

[jratl:]

The problem is not with laymen making decisions. An honest, informed layman can inject some much needed common sense into the process. Financial experts and scholars knew exactly what they were doing when leveraging and packaging derivatives that the layman could never understand. The financial experts have made their money I don't trust them to fix a problem they created. The hard working layman taxpayer is paying the bill, the least we can do is respect the taxpayer's opinions. I only hope the taxpayer is able to find an honest representative before goes into the voting booth.

Apr 20 01:54 PM

[wavelength:]

Well said jratl - but do you ever worry about all those voters who are not taxpayers?

Apr 20 02:22 PM

[jratl:]

wavelength - Good point! Another reason for fair taxation where everyone has some skin in the game.

Apr 20 03:05 PM

[DMcD:]

Sure am hearing a whole lot of negative comments coming from the 'peanut gallery' --- you know; the ones with all the fancy economist degrees who have 'lost all credibility' after having gotten us 'all' into this god-awful mess. Credit where credit (or a lack thereof) is due. No matter a lack of accreditation , it would be very hard for 'anybody' to mess things up any worse than these so-called 'experts'.

Apr 20 03:25 PM

[Kinabalu:]

<The first time I heard that interview, I was terrified.>

At least Campbell knows what a P/E ratio is. How did you feel when you heard Obama bungle that concept?

Apr 20 05:11 PM

[Leftfield:]

We would have more representatives that followed the decision-making process more like this article if incumbents got voted out heavily this time around. And next and next. Does anyone think Dodd or Frank will ever see the world like a constituent struggling in the real world that those fools have already had plenty of time to trash?

We've allowed politicians too much say anyway; government does not belong in every decision we make. Shimkus is going to decide whether they tax the air now. At least he is on the right side of it.

Apr 20 05:44 PM

[Stone Fox C...:]

Maybe we should elect more businessmen and less lawyers. The system just isn't designed to pull in financial wizards.

Apr 21 11:45 AM

[31October:]

Hell is empty.

The devils are all in DC.

Apr 21 12:48 PM

[MBL:]

Do you mean businessmen like Dennis Kozlowski, Ken Lay and Bernie Madoff? I doubt it. Lincoln was a lawyer The problem is when you make decision based on generalizations and cliche's' regarding occupation, party affiliation etc as a substitute for analysis and thinking, you get in trouble. In the end its integrity and competency which carries the day.

Apr 21 08:46 PM

[Mike Razar:]

We could always elect honest businessmen to Congress. Just a thought. I have seen no actual evidence that any of the scholars you cited even understand derivative products. That is a harsh judgment, since most derivatives easily understood by a smart undergraduate.

The best paragraph in this good article is the one that starts with "Ultimately this means two things..."

Apr 21 09:58 PM

[dcb:]

I would imagine the CO2 comment was fed to him by someone with industry connections who essentially paid to have it said.

May 02 10:50 AM