Tuesday, July 3, 2012

Who's to Blame, the Cheating Spouse or the Home-Wrecker?

Joseph Stiglitz, the Nobel Laureate economist, is a champion for big government and equality of outcomes. In a recent interview with CNBC, he railed against the rent-seeking activities of large financial institutions (I totally sympathize) and suggests that adding yet more regulations is the answer (I totally reject). He doesn't seem to get that rent-seeking, from wherever (corporations, unions, environmental activists), is a byproduct of big government. The more influence political actions have over industry, over the economy, the more the incentive to lobby favor.

I can write volumes on why government is the chief source of our modern-day woes, and cite instances of cronyism (from both sides of the aisle), throughout our entire history, that would make your blood boil. But for today I'll simply dispel Dr. Stiglitz notion that the repeal of Glass-Steagall set the stage for the 2008 credit crisis.

In a nutshell: The Glass-Steagall Act of 1933 restricted banks to simply banking. That is, commercial banks could not do investment banking, and vice versa. University of Chicago's Luigi Zingales in his book A Capitalism for the People states "One beneficial side effect of the Glass-Steagall Act, as with most of the other banking regulations, was to fragment the banking sector and reduce the financial industry's political power."

Glass-Steagall's dismantling came gradually from the '70s on. State restrictions on branching were the first to go. In essence, banks, under Glass-Steagall, were constrained in terms of branching throughout the states. But it took the Gramm-Leach-Bliley Act of 1999 to finally remove the separation between commercial and investment banks. And you can bet your bank account that G-L-B was inspired by heavy lobby from the financial industry. As Zingales points out (I paraphrase), 'the alignment of all the major players in the financial industry amplified their ability to influence policy.' It's therefore easy to understand why the Stiglitz's of the world are crying foul - and, in many ways, rightfully so.

But here's the thing, make that a couple things: One; suffice it to say (as I did above) that the larger the government, the larger the lobby. And the more successful the lobby, the larger the lobbying entity or industry. But where should we focus our attention anger; on the CEO or the Congressman? The CEO is forever courting the congressman and vice versa. But we (the people) hired the congressman. I'm thinking he's the one we need to kick in the rear. Seriously, when a spouse cheats, whom do you blame - the spouse or the "home-wrecker"? The spouse, not the home-wrecker, took the vow. The cheater therefore is the spouse (the congressman). And two; contrary to Stiglitz's claims; the repeal of Glass-Steagall, some would say, ultimately saved us from the next Great Depression. Per Zingales:

"The apex of this process of deregulation and consolidation was the 1999 passage of the Gramm-Leach-Bliley Act, which completely removed Glass-Steagall's separation between commercial and investment banks. Gramm-Leach-Bliley has been wrongly accused of playing a major role in the 2008 financial crisis; in fact, it had almost nothing to do with it. The major institutions that failed or were bailed out during the crisis were either pure investment banks that did not take advantage of the repeal of Glass-Steagall (e.g., Lehman Brothers, Bear Stearns, and Merrill Lynch) or purely commercial banks (e.g., Wachovia and Washington Mutual). The only exception was Citigroup*, which had merged its commercial and investment operations even before the Gramm-Leach-Bliley Act, betting that the law would be changed."

*By the way, Robert Rubin took a high paying position at Citi immediately following his term as Treasury Secretary (one of those blood-boiling incidents).

Thus, on the surface, the repeal of Glass-Steagall had virtually nothing to do with the '08 meltdown. The opinion that the repeal indeed saved the system stems from the fact that, with the exception of Lehman, the failed companies were taken over by the likes of JP Morgan, a company that took full advantage (combined commercial with investment banking) of Glass-Steagall's repeal. As opposed to outright failing and (like Lehman) dumping their garbage all over the credit markets.

I could be inclined to argue against Zingales' position, and say that Glass-Steagall's repeal in fact contributed greatly to the crisis, in that it allowed financial institutions to behemothize themselves - making them too big to fail. But here's the thing, "we" bailed out the little guys (the purely investment banks and the purely commercial banks). If even the little guys were deemed too big to fail, it clearly was not the result of Glass-Steagall.

Lastly: Consider the sheer volume of today's regulations. Per Zingales: "In 2010 we saw the passage The Dodd-Frank financial-reform bill, which was a staggering 2,319 pages long. Things were not always this way. The Glass-Steagall Act, which in 1933 separated investment banking from commercial banking, was just thirty-seven pages long. The act that created the Federal Reserve in 1913 ran to thirty-one pages. Even the recent Sarbanes-Oxley Act, which was written in response to the Enron and Worldcom scandals, was only sixty-six pages long. Tellingly, the Dodd-Frank bill was popularly called the "Lawyers' and Consultants' Full Employment Act of 2010." It may well have created more jobs than Obama's original 2009 stimulus package did.

Each page of regulation probably provides a year's worth of employment for several lobbyists and a couple lawyers and economists. This gigantic waste is never properly factored into our economic analysis. But the biggest cost is the smokescreen that overregulation creates. For centuries, in Continental Europe, laws were written in Latin, a language that ordinary citizens could not understand. As institutions were democratized, laws started being written in the vernacular. Overabundant regulation and the legalese that it is written in, achieves the same goal as Latin once did: to confuse the public."When I was writing regulations," says one retired EPA regulator, "I was told on more than one occasion to make sure I put in enough loopholes. The purpose of the complexity is to hide the loopholes.""

Again, the bigger the government, the more complex the regulations, the bigger the confusion, the bigger the cronyism. Clearly we have to turn our attention to the source, the adulterer—the politician.

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