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Geithner Backpedals Plans for Financial Dictatorship
If recent events have taught us anything, it's that financial institutions can take care of themselves (and the larger economy, for that matter) just fine without the federal government. Which is why the Obama Administration's proposals to expand the government's authority to command and control "oversee" the financial industry were recognizable from the start as needless government meddling. Now, with lawmakers balking, regulators criticizing, and health care reform the Administration's one and only priority, Timothy Geithner finally seems to understand that banks, mortgage lenders and credit card companies can be trusted to police themselves. At a hearing Friday before the House committee that services the financial industry, Geithner suggested that the Obama Administration would agree to revise parts of its plan to overhaul financial-market regulation, which the WSJ reports has "lost momentum" due to political and industry criticism and a "turf war" between federal agencies. Geithner told lawmakers the criticism from regulators should be viewed as efforts to defend their agencies' "traditional prerogatives," by which he presumably means the prerogative not to exercise their prerogative of supervision. Geithner also admitted the existence currently of "a lot of dumb regulation," apparently not noticing his redundancy. At the same hearing, Comptroller of the Currency John Dugan expressed "serious concerns" about the Administration's proposed financial consumer-protection agency, which would regulate mortgages and credit cards. Fortunately, Dugan knows that financial consumers don't need a government agency to protect them -- mortgage lenders and credit card companies already offer "mortgage rate protection" and "credit card theft protection," among countless other reasonably-priced products that protect consumers from the financial industry. (See: http://online.wsj.com/article/SB124844131710678963.html).
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I'm a systems architect. One of the fundamental principles that I find when designing software systems (and one that's pretty much enshrined from an architectural standpoint) is that you design your debugging and monitoring software in tandem with your code, rather than after the code has been written. Why? Because the more complete your system, the harder it is to get any meaningful information about the system from external applications.
The regulatory system is the debugging mechanism for the economy. It insures when systems are consuming too many resources unnecessarily that a flag is raised indicating this may be a trouble spot. It determines when a bounds overflow error has taken place, where a company has overstepped its authority, and it identifies situations where there may be deliberate attempts to subvert the system by external viruses or trojan horses.
Over the last 30 years, business (especially the FIRE sector) has been upgraded to the new version as automated systems, sophisticated networks and increasingly powerful algorithms have been introduced into the economy. Unfortunately, largely because of a strong ideological bent on the part of the system architects and debuggers (the various congresses and administrations) over the last thirty years, the regulatory mechanism was deliberately left to lag, which mean that businesses first found the regulatory mechanisms cumbersome, then found ways to work around them, then ultimately found ways to subvert them.
Now Obama and company are dealing with a regulatory system that is ultimately both broken and heavily compromised. The SEC has only just started requiring (post-EDGAR) electronic XBRL filing statements (as of about two weeks ago, actually) that actually have the ability to be analyzed electronically - and arguably their staff is probably not yet sufficiently code savvy to be able to make these analyses. The FDIC has been doing it longer, and the efficiency with which they are able to move in and take over a bank when necessary should be a testament to the efficacy of this process, given that a bank failure is usually a fairly complex process.
Needless to say, the FIRE industry is fighting this with everything they have. They are calling in favors in Congress to forestall everything from having to report electronic financials to moving towards a single electronic health care record. The near parity Democratic/Republican distribution in this country has meant that many of those elected tend to be centrists, which means that they too are at least somewhat pro-business as the center has been pushed towards a strong pro-business bias for the last thirty years. This next election cycle, in which many of these companies will be sufficiently weakened by the economy to be unable to elect sympathetic representatives, should be very interesting - I suspect that while the overall bias will still be for the Democrats, incumbant Democrats may very well be unseated in droves by newcomers more to the left than they are.
The turf wars right now are something of a sideshow (and are, from my own contacts in that sector) considerably overblown. It really doesn't matter whether these organizations are in fact consolidated or not. What matters is whether they end up having compatible and internally shareable data resources, which means moving towards common electronic standards. This process is in fact occurring, and in many respects its far more important than whether you have a nominal superagency or not.
Indeed, there are a number of advantages to there being multiple more specialized agencies that can nonetheless share critical information, not least of which being that such specialized agencies will tend to be able to focus on one or another aspect of industry without themselves being compromised from above. Additionally, by sharing information, they also establish a form of checks and balances that make it harder for an outside agency to compromise them.
However, none of this will make any difference unless the transparency movement that was a key part of Obama's campaign platform continues unabated. Government that is not transparent to the people at large is simply a vehicle for the oligarchy. There are worrisome signs that key people both within and advising the administration are acting on behalf of that oligarchy, and certainly Congress should not be seen as being much less free of taint than it was in the past (though it is still a far cry better than it was when the government was completely in Republican hands).
It took 30+ years for our economy to get to the shape that its in right now. It will take years, a lot of hard work and the abandonment of a lot of "accepted wisdom" before it is truly healthy again. Throwing away what little regulation is actually working today and returning to unfettered oligarchic capitalism is not going to do anything but extend the pain.
The debugging analogy sounds great, but to draw it out to its logical end, that means whoever wrote the debugging software at the time knew what was actually wrong. The government regulators are just that smart. If they were, why are they working for the government?
There is no magic program that will tell us how much to consume or produce or invest AND when to do it. F.A. Hayek was awarded a nobel prize in economics for pointing this out to the world. His speech "The Pretense of Knowledge" is a particularly good reading.
And Oligarchic Capitalism is an oxymoron. Capitalism by it's very nature is anarchistic. That's why government's attempt to control it.
Some principles of capitalism work beautifully on a small scale, when you can see your competitors' and customers' faces.
On a national/global scale, it's just too easy to succumb to the temptation to manipulate the markets, bribe members of the government and kill competition or supress any good idea that might interfere with your short term profits
The danger of large-scale capitalism isn't anarchy, it's self-destruction. The addiction to short term gains is so powerful (as we have recently seen, and will many times I think before this smoke clears) it makes corporations willing to destroy their own companies and countries to get their next fix.
Well said!
I have seen what the concept of self regulating markets really means. Self regulating in practice means the more you lose the more you make. Folks on the street are incapable of enforcing the law of the flats upon themselves.
I don't know when this whole pile of crap is going to collapse in one big steaming heap but it's coming.
According to Newsweek, the recession is over. http://www.newsweek.com/id/208633
Is it just me or does it feel like a total disconnect, are we hearing voices of green shoots from a virtual world in second life ?
Oh yes. And I pity the fool that does not have guns and gold when that collapse ensues.
I am Chumbawamba, and I once met Mr. T.
If you're hoarding gold, you're going to need your guns. But you'll soon run out of ammunition, so what you might really need, chumbawamba, are some magic beans.
chumbawamba,
The little girl at Albertsons can't even give me the correct change and it's right there on the register screen! I'm going to buy a loaf of bread and have her figure out how much gold I need to give her and how much silver she has to give me in change? Oh, Yeah!
I ain't gonna waste my time or fiat currency buying gold. Why should I? I'll just take it at gunpoint when/if the time comes.
I am Will Profit, and I am locked and loaded for the Obamaclypse.
Bazookas will be a good investment to relieve the gold and ammo guys. I will probably do that.
Boy, will you be in for a shock.
I am Chumbawamba.
"The fatal flaw of capitalism is that it is fundamentally beyond regulation. Advocates of laissez faire have always recognized this, arguing that in order for capitalism to work it must be allowed to proceed free from external constraints. The theory has always been that "the market," driven by "enlightened self-interest" (aka "greed is good"), will naturally regulate itself, because self-regulation is in the interest of all market players. External regulation, so the argument goes, will only introduce distortions that interfere with the natural balance of an inherently self-regulating system. As has long been known, however, laissez faire capitalism works only for the benefit of the few, with maybe some degree of trickle-down to the rest of us, if we're really lucky. And as we've only recently learned, laissez faire capitalism, when carried to an extreme, can be so self-destructive as to put everyone at risk.
So if capitalism cannot be relied on to regulate itself, then government needs to step in and regulate it, right? Wrong. The "free market liberals" were in fact correct in arguing that external regulation won't work -- though probably for the wrong reasons . . .
Obama, Geithner and Bernanke are in essentially the same untenable situation. And in fact any regulator or regulatory agency would inevitably be placed in the same untenable situation. So long as all goes well and there is nothing to regulate, then you can do your job of regulation really well. As soon as something goes wrong, however, then, simply by exercising your regulatory responsibilities, you run the horrible risk of precipitating the calamity you were hired to avert."
from http://amoleintheground.blogspot.com/2009/05/stress-tests-regulatory-cap...
Oh yeah, and one more thing:
The reason regulation is so vulnerable to capture in the first place is because the world economy now depends on the same risky and corrupt practices governments are now seeking to control. Maintain the status quo and you enable the finance-junkies to continue along the same self-destructive path -- alter the status quo and you literally kill the goose that laid the golden eggs.
DocG (NOT so anonymous as one might think)
Agreed Brown_hornet - but that means some regulation to ensure the fallen don't take us down with them. No more unfettered, too big to fail firms.
Lizzy36, yes, you can't have people that are on the pirate payroll making regulations. Referees should not have conflicts of interest.
Government doesn't need to be involved so heavily if fear is put back in the greed-fear equation. Let the scoundrels fall under their own weight instead of being bailed out. Ordinary people with real skills will go on and prosper.
Geithner and his puppet masters should start with the basic theory that the most powerful referee is failure.
As near as i can tell, the regulatory debate is being subsumed by an idiotic turf war. Which at this point may not be a bad thing. If past performance is a reflection of future success......
The attitude here goes along with my deeply sarcastic assertion : "Let them be. They'll still have to settle up with God"
That's the watchword for people who know they're guilty and those who want to excuse them.
The deregulation era in Washington has been going for 30 years. Sounded good at the time and provided for short term growth (more lawyers and accountants needed to deregulate if nothing else).
The results have not been pretty for many industries and their customers (airlines, telecom, Enron) but none has been more spectacular than banking:
We've now gone through TWO gigantic banking crises in less than twenty years!!
That's way better than the Great Depression which only had one followed by sustainable growth which lasted...until deregulation! Now it looks like the Federal Government has to come in like the National Guard during a riot and restore order and confidence or else face systemic collapse.
"Government is not the solution to the problem. Government
Is the problem"
Except, it seems, when weazles are back in control.
Allow the financial markets free reign and you create exactly what this blog rails against--and exactly what caused the meltdown -- very powerful, and very corrupt institutions that foster anything but a "free" market. Beasts like Goldman feed on this kind of flawed thinking.
And now, so soon after they used their freedom to buy a blind eye from the government and then proceed to destroy so much wealth, these pirates wail about "socialism" from the decks of their stinking, still sinking ships.
These mauraduers very successfully used "libertarianism" as their cover -- which (hellllooo) should be a wake up call about self-regulation's unsoundness and impracticality.
Frankly, we should all be dead tired of these "isms" being tossed around as problems or solutions to the crisis.
If we come up with something that works it's not going to be drawn from the goofy-eyed optimism of any of these theories- it's going to be a hard look at what actually has worked in practice.
For starters, it will acknowledge that the game needs powerful referees to work. And that has to be the role of the government and the law.
"If recent events have taught us anything, it's that financial institutions can take care of themselves (and the larger economy, for that matter) just fine without the federal government. ... Timothy Geithner finally seems to understand that banks, mortgage lenders and credit card companies can be trusted to police themselves. "
Amen to the first two posts. As a B of A shareholder and a taxpayer, I have no faith in the ability of financial institutions to take care of themselves or the economy.
Wow, you would have a trifecta if you told us you were also the desginated bottom in an all-male S&M club.
I am Chumbawamba.
Yeah, those who doesn't undersand that these money-grubbing sociopaths have demonstrated their capacity and willingness to police themselves must be stupid, crazy, "socialist" or blind!
Glad we've learned so much! I'm now enlightened!
Next we'll have self-service, felon-run prisons. Why spend all the extra money on staff that only gets in the way of successful rehabilitation? Hell, the real problem must be bad laws, not bad actors.
We should probably get rid of all laws and trust everybody, caveat emptor.
Pretty funny stuff! Financial institutions can take care of themselves if they have access to the U. S. Treasury.
The really smart, free market capitalists at Goldman Sachs certainly didn't benefit from any government action regarding AIG, LEH, BSC.