But maybe the lesson is that we need less regulation. The attempt to reduce risk to zero is an illusion. Maybe it is better to have the risk more out in the open where investors are much more cautious because the government is not the backstop.
As I see it, the crux of the Chicago & Austrian schools of economics’ arguments comes down to two things.
- Don’t tax me.
- Don’t legislate the market.
The opposition to any stimulus spending is that it must ultimately be paid for by taxes. The opposition to regulation is that the market should not be interfered with by the government. I don’t mean to oversimplify a school of thought in defense of which volumes have been written, but as advocates of the school deny that the market can be successfully manipulated (or even understood), there isn’t a lot of room for theory. As Marlo put it, “The game be the game.”
Russell Roberts – who has caught my critical eye more than once – wrote today about his reactions to Paul Krugman’s The Return of Depression Economics and the Crisis of 2008. It’s a good read, and one of Roberts’ few posts not filled with snide remarks in place of reasoned ideas. He doesn’t attack Krugman on the grounds that he’s Krugman. Instead, Roberts gives a fairly clear description of his market ideals when it comes to regulation.
In explaining his views, Roberts points clearly to the problem I have with his school of economics: its success requires a world every bit a fantasy as Marx’s Communist utopia. In the supply-side world, the lack of regulation will reshape the market into a self-policing, transparent economic machine. It’s an idea that, if such an idealistic world could ever come to pass, might make sense. That it requires a wholesale change in human nature is where the theory collapses, just as Marx’s Manifesto only works if the majority of human beings suddenly began to care more about community than themselves.
Roberts suggests that transparency would enable the market players themselves to gauge risk without the government telling them what they can and cannot do. He’s right, too. Transparency would do exactly what he’s suggesting. But how to achieve that transparency?
Freed from regulations, how many corporations would not only open their books, but do so in a fashion that precludes stat juking or misdirection? If a bank is losing money, what’s to stop them from hiding their losses in creative bookkeeping, just as they did in the run-up to this crisis? The problems facing our financial systems originated in largely un- or under-regulated domains; just look at the havoc caused by the unregulated, privately traded Credit Default Swaps that the market used to hedge against risk.
The fact of the matter is, when corporations were far less regulated – such as at the end of the 19th century – they engaged in all manner of shady practices. It’s been demonstrated time and again that short-term profit motive is one of the most common and unquenchable desires in the human makeup. That a lie is unsustainable, that a practice is ultimately destructive, that a bonus today will lead to termination tomorrow; none of this matters if the perceived short term reward is large enough.
Roberts is suggesting that less regulation would lead the market demanding transparency so as to properly assess risk. I think his suggestion is right, but the market demanding and the market providing are not the same thing. If there are no legal ramifications for misleading others about the risk you represent, why would a corporation be honest? The price you pay in the market for misrepresenting yourself is the eventual collapse of your company. Is this punishment at all meaningful to someone who has already gotten paid large sums of money prior to the discovery of the lie? If you’ve gotten so rich off of your deception that you no longer need to work, what leverage does the market have against you?
Being rich means less in prison than it does on St. Croix. Effective regulation gives the public – the entire public, not just market players with enough money to make waves – the power to punish those who execute their positions improperly. Regulation also puts the onus of investigation onto those with the resources to do it properly. While a institutional investor has a chance at assessing the risk of an opportunity, individuals looking for somewhere to place their retirement savings do not.
Think back to Upton Sinclair’s The Jungle. What chance did an average citizen have of discovering the conditions under which their meat was stored and processed? Even if Cargil would allow me to walk through their factories, how am I to afford making such a trip just to ensure I’m not eating rat poop with my pork chop?
Now, imagine a corporate accounting department with CPAs, lawyers and former physics students. They’re doing everything they can to hide forthcoming losses. How am I – a simple .Net programmer – going to have any chance of assessing the risk of any investment in that kind of environment? Will I trust the risk assessment of a third corporation, hoping that they are both competent and have no vested interest in misreporting the facts? Or the media, who are now owned by the same corporate interests we ask them to watch?
I believe that Roberts is saying that our current regulatory system has failed. I agree. I also agree that transparency is a necessary component to risk assessment. Here’s my question: How do we demand honest transparency without regulation of some kind? It would be saner to demand a regulatory system that provides the transparency that the market needs to do its job without further interference. A world where corporate interests support full transparency is a fantasy, far less likely than one in which government regulation can provide enough oversight to reduce the frequency and scope financial shocks. Roberts doesn’t trust the government, and I can sympathize, but why he trusts corporations more is a mystery to me.
My government is flawed, cracked and sometimes utterly non-functional. Yet, I can still vote for its officers. I can demand changes, fight corruption and support its best efforts. I need no money, no capital, to have this voice. Instead, my vote is given freely to me, a right of citizenship that all possess. Not so with corporations, who have sold the majority of their votes to high-income members of their own world. My control over my government is weak, but it’s the greatest gift this nation has given me. It’s a gift no corporation will ever give me, under any circumstances. If I must choose to trust an institution – and, like it or not, we are forced to do so every day – I choose the one that calls me a citizen, not a customer.