Thursday, May 7, 2009

Fed Up: Why we need small government populism

There's been something of a dust-up over a purchase of Goldman Sachs stock by the Chairman of the New York Federal Reserve; a purchase made while Goldman had business before the Fed, which is also Goldman's regulator.

Over at Slate, Eliot Spitzer has a great piece describing the special place of the New York Fed in our financial system and how it is entirely dominated by the large financial institutions it is supposed to be regulating. Here's the takedown:
So is it any wonder that the N.Y. Fed has been complicit in the single greatest bailout of poorly managed banks in history? Any wonder that it has given—with virtually no strings attached—practically the entire contents of the Treasury to the very banks whose inability to manage risk has brought our economy to its knees? Any wonder that not a single CEO or senior executive of a major bank has been removed as a condition of hundreds of billions of direct cash and guarantees? Any wonder that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank?
It is now clear that there is something even worse than too much regulation, worse, even, than too little regulation. Namely, a public regulatory scheme that is little more than a thin veneer covering a privately controlled system utilized to deliver private gain.

Not illegally mind you, this is strictly above board. It is the use of access and influence to provide maximum value for shareholders, the primary duty of those that run public companies.

There is nothing wrong with trying to deliver value to shareholders, but the means for doing so used to be production of valuable goods and services. If we have entered a time when the means to deliver shareholder value is by having the ear of government officials, we have truly entered the age of decadent capitalism.

This phenomenon highlights the limits of effective regulation. When regulation is complex and carried out in secret, there will be those that will find ways to game the system. Always.

Minimal regulation intended to prevent only the most calamitous outcomes, enforced in full view of the public is the best hope we have of preserving our own welfare and preventing the very real human suffering that results when government serves the interests of business before it serves the interests of the people.

1 comment:

Steve said...

I think there is a built-in decadness
to capitalism that has to be considered in any discussion of its merits and drawbacks. This would seem to apply to the present situation in particular and to the future in general.