Jerry Bowyer
The risk of new regulation
By Jerry Bowyer
It's never a good sign when your Treasury Secretary announces a plan to overhaul the financial system and the market plunges 200 points that same day. But that's what happened on Monday to President Obama.
It's no better when you, the president himself, release the details of that plan two days later and the market nosedives again as you are speaking. And it's certainly not a good thing that during the big rollout week of the financial stabilization plan, the VIX — the volatility index aka the "fear index" — shoots through the roof after a long period of steady decline.
Obama's plan calls for a uber-regulator, a new entity made up of a counsel of great minds, who would scan beyond the horizons of normal financial regulators — beyond banks to any entity that they deem poses financial risk, beyond national borders to any hedge fund, venture capital shop or holding company that dares invest in a U.S. financial firm, beyond the present into the future.
Gone are the days when bank regulators have their powers limited only to banks, or national regulators only to domestic companies, or police powers only to crimes already committed. This entity's job is not just to enforce the rules. Its job is to create rules, to "find gaps in the regulations" and fill them. The grammar of the uber-regulator is not just expressed in the imperative voice of law, or the declarative voice of finding; it speaks in the subjunctive mood as well, about what might and ought to be.
But perhaps Geithner, Summers, Bair and Bernanke are up to the challenge. Perhaps the man who didn't know how to do withholding on his 1099 is up to identifying "systemic risk factors" in a global economy with billions of participants and trillions of transactions. Perhaps Sheila Bair can refocus away from her personality conflict with the CEO of Citigroup and onto the good of all mankind. Perhaps Summers, once liberated from his Faustian pact with the president, will stop placing his considerable gravitas behind lunatic ideas and finally listen to sane economics.
And perhaps Bernanke will not follow the example of his predecessor. Greenspan had created a gigantic liquidity bubble, and when it burst he faced a choice: Blame himself or blame the market. He chose the latter. A personal acolyte of Ayn Rand, the high priestess of libertarianism, was forced to "re-think" his "free market ideology." I guess changing your principles is less psychologically painful than admitting your failures.
But will Bernanke be any different? He has more than doubled the monetary base in the past year. When this bubble bursts, he will be forced to make the same choice. Who failed, Bernanke and his bank or the firms that he regulates?
This is a lot to expect from a bunch of GS-15s. (That refers to the government pay grade in which officials earn in the low six figures.) I suppose the gamble is that giving them enough power will make them better people.
But history suggests otherwise. The Financial Working Group, which called itself "The Committee to Save the World," got us into this mess under Bush. It proposed the original plan to purchase troubled assets, but then concluded that it wouldn't work and switched to direct investment, but passive only — and then Obama took over and started nationalizing firms. All the while, stocks dropped and the recession worsened. The Fed saw none of this coming — none of it — and they even resisted suggestions that they were causing it.
In some ways, the Fed itself was the original committee to save the world. At the turn of the last century, the Democrats' favorite Republican, Teddy Roosevelt, went on a mission to put business back in its place. He believed that companies had become too big and too powerful and needed to be broken up and regulated.
Then, as now, capital went on strike. Historians call it the Panic of 1907. Teddy asked for help and J.P. Morgan convened a group of investors that re-capitalized the system.
Morgan's committee really did save the world. But an angry, spiteful Roosevelt decided to create a committee of wise public servants who would regulate the system and provide capital as needed. (He wouldn't be the last to do so.) He set the wheels in motion and, five years later, the Fed was born. It did not, unfortunately, save the world. Our greatest and deepest depression lay ahead.
It's no surprise that Obama quoted the New Testament three times while announcing this plan. What he is building is less like a political entity and more like a divinity.
To Obama, the old order of securities created by contracts freely entered into is like the "house built on sand" in Jesus' parable. Obama's doctrines of fairness and planning are like the foundation of rock on which the new order will be built.
The problem is that the parable is not about Obama or Bernanke or Summers or any other frail, flawed, limited human being. And any political philosophy that ignores the tragedy of human limitation, that gives men the responsibilities and powers of gods, will fail. It always has.
The plunging market and spiking VIX remind us what Sunday school and Hebrew school and Shakespeare have already told us many times: that great concentrations of power do not bring stability, they destroy it.
© Jerry Bowyer
June 19, 2009
It's never a good sign when your Treasury Secretary announces a plan to overhaul the financial system and the market plunges 200 points that same day. But that's what happened on Monday to President Obama.
It's no better when you, the president himself, release the details of that plan two days later and the market nosedives again as you are speaking. And it's certainly not a good thing that during the big rollout week of the financial stabilization plan, the VIX — the volatility index aka the "fear index" — shoots through the roof after a long period of steady decline.
Obama's plan calls for a uber-regulator, a new entity made up of a counsel of great minds, who would scan beyond the horizons of normal financial regulators — beyond banks to any entity that they deem poses financial risk, beyond national borders to any hedge fund, venture capital shop or holding company that dares invest in a U.S. financial firm, beyond the present into the future.
Gone are the days when bank regulators have their powers limited only to banks, or national regulators only to domestic companies, or police powers only to crimes already committed. This entity's job is not just to enforce the rules. Its job is to create rules, to "find gaps in the regulations" and fill them. The grammar of the uber-regulator is not just expressed in the imperative voice of law, or the declarative voice of finding; it speaks in the subjunctive mood as well, about what might and ought to be.
But perhaps Geithner, Summers, Bair and Bernanke are up to the challenge. Perhaps the man who didn't know how to do withholding on his 1099 is up to identifying "systemic risk factors" in a global economy with billions of participants and trillions of transactions. Perhaps Sheila Bair can refocus away from her personality conflict with the CEO of Citigroup and onto the good of all mankind. Perhaps Summers, once liberated from his Faustian pact with the president, will stop placing his considerable gravitas behind lunatic ideas and finally listen to sane economics.
And perhaps Bernanke will not follow the example of his predecessor. Greenspan had created a gigantic liquidity bubble, and when it burst he faced a choice: Blame himself or blame the market. He chose the latter. A personal acolyte of Ayn Rand, the high priestess of libertarianism, was forced to "re-think" his "free market ideology." I guess changing your principles is less psychologically painful than admitting your failures.
But will Bernanke be any different? He has more than doubled the monetary base in the past year. When this bubble bursts, he will be forced to make the same choice. Who failed, Bernanke and his bank or the firms that he regulates?
This is a lot to expect from a bunch of GS-15s. (That refers to the government pay grade in which officials earn in the low six figures.) I suppose the gamble is that giving them enough power will make them better people.
But history suggests otherwise. The Financial Working Group, which called itself "The Committee to Save the World," got us into this mess under Bush. It proposed the original plan to purchase troubled assets, but then concluded that it wouldn't work and switched to direct investment, but passive only — and then Obama took over and started nationalizing firms. All the while, stocks dropped and the recession worsened. The Fed saw none of this coming — none of it — and they even resisted suggestions that they were causing it.
In some ways, the Fed itself was the original committee to save the world. At the turn of the last century, the Democrats' favorite Republican, Teddy Roosevelt, went on a mission to put business back in its place. He believed that companies had become too big and too powerful and needed to be broken up and regulated.
Then, as now, capital went on strike. Historians call it the Panic of 1907. Teddy asked for help and J.P. Morgan convened a group of investors that re-capitalized the system.
Morgan's committee really did save the world. But an angry, spiteful Roosevelt decided to create a committee of wise public servants who would regulate the system and provide capital as needed. (He wouldn't be the last to do so.) He set the wheels in motion and, five years later, the Fed was born. It did not, unfortunately, save the world. Our greatest and deepest depression lay ahead.
It's no surprise that Obama quoted the New Testament three times while announcing this plan. What he is building is less like a political entity and more like a divinity.
To Obama, the old order of securities created by contracts freely entered into is like the "house built on sand" in Jesus' parable. Obama's doctrines of fairness and planning are like the foundation of rock on which the new order will be built.
The problem is that the parable is not about Obama or Bernanke or Summers or any other frail, flawed, limited human being. And any political philosophy that ignores the tragedy of human limitation, that gives men the responsibilities and powers of gods, will fail. It always has.
The plunging market and spiking VIX remind us what Sunday school and Hebrew school and Shakespeare have already told us many times: that great concentrations of power do not bring stability, they destroy it.
© Jerry Bowyer
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