The endless blare of the reality show of politics turns our leaders into mere celebrities. As such, their heads appear to swell to the size of a Stalin, Hitler, Mao, a Kim, Castro, or Hugo Chavez.
Management is essentially paternalist. It is stewardship. In theory it is best accomplished by trustworthy functionaries with no personal agenda. Personality, style, and delivery have little to do with good governance, only with appearance to the public and thus the public’s confidence. We rely on political parties to distinguish the real mensches from the jerks. But how trustworthy are these people? How knowledgeable? Who will Dear Leader delegate to? How trustworthy or knowledgeable are they? Today these individuals all seem to be cogs in a big machine in which no one is ever held accountable for their failures.
Caligula thought his horse was so beautiful, it should be ruler. We seem to pick our political leaders the same way. When Jacques Barzun wrote “From Dawn to Decadence,” he wasn’t kidding about our decadence.
Government has certain responsibilities. It is supposed to administer justice and enforce market integrity. It can’t prevent all evil, but it can punish proven instances of it. Government is supposed to try to maintain competitive market conditions. It is supposed to assist caveat emptor. To this end there are rules of full disclosure to try to counteract deceit, of full and fair disclosure of all material facts, of avoidance of conflicts of interest, bargaining at arm’s length, and the like. But law can’t do everything. It can’t prevent all lemmings from herding off the cliff or following a Pied Piper or bubbles from forming.
The government does not “run the economy.” Nor does the Fed. Congress inevitably affects the economy in the laws that it writes, but it is not supposed to rig or interfere with private choices of capitalist markets. Subsidies should be limited and temporary. Subsidy creates dependency and distorts markets. Good management can sometimes correct for the agency problem of economics in big organizations. But delegation of responsibility cannot go on forever without damaging accountability. Job tenure for life is only sometimes an optimal arrangement; in some contexts it breeds negligence, sloth, and system failure.
The Fed is a macroeconomics research institution, a kind of think tank. It is supposed to be apolitical. In the end all it does is expand or contract money supply. It does not “run the US economy,” as too many journalists and politicians seem to think. Fairness is an attribute of law, not of economics. Economic fairness is a matter of individual consent among market actors. If you write loads of law and constantly swap out the rules of the game, it raises the costs of doing business, favoring big, established businesses and disfavoring competitive upstarts. This is the opposite of fairness.
Our leaders accept ever less responsibility for anything. They are mere figureheads. Electing a new one every 2-4-6-8 years seems to change little.
Government privatized its national insurance monopoly in 1968. LBJ wanted the GSEs off the government’s books when paying for Vietnam and the Great Society. Back then, they seemed like liabilities. In doing this, the government ignored the basics. It abdicated a lucrative monopoly mortgage packaging operation to Wall St. It might have been fine had the GSEs’ rules stayed in place. Instead, Democrats pressured private banks to lend to deadbeats. “We gave you this rich cash cow, so now you pay us back in this form.” They set switches in reverse, bargaining with Wall St. when they had no business doing that. This made the financial crisis inevitable. It was predictable and preventable, but no one took responsibility for the big picture. Handing a government monopoly to a set of oligarchs is a cartel, not market competition. Sure, it can work, but it needs to obey a few rules.
So government was to blame for the 2008 financial crisis. We know how to avert fraud and they should have attended to it, but didn’t. In a 40 year long screw-up, no one person can be legally blamed. Pinning that degree of mens rea down is hard.
Presidents are hamstrung from doing any real management. They thus can’t act as a true executive. This grinds checks and balances to a halt.
The government is too large and too unaccountable. It is incompetent and ill managed. Too many laws create regulatory tangles and economic gridlock. Marketing dominates politics at the expense of substance. Increasingly, there is rising contempt for law itself. Hired gun sophists take dog eat dog adversarialism to extremes and argue over nonsense if it might pay. Extremes exist on both right and left.
The only cure for nonsensical hyper-regulation is to ignore it.
We have an epidemic of bureaucrats who Peter Principle to the level of their incompetence. The role of the law in manipulating economic effects is supposed to be secondary to the national good. But the “sophisticated” social science trend of the day is to view the effect of law on economics with glee as a means of making money for oneself.
The Constitution envisioned a separation of powers in a division of labor—distinct governmental corporate functions “checking and balancing” each other. The size of government breeds hyper-specialization and stovepiping, and deters management. No one is able to see the forest for the trees, nor has any one person the power to change the course of government, even if they do. Government actors are unaccountable for bad performance. Leaders over-promise to get elected, then over-legislate in office, just to pretend to the electorate that they’re working “for them.” This leads to ever more socialism from which only the corporate and political class benefit. Loads of bad law then breeds disrespect for all law, leading to a decline in morals. People become accustomed to evading law, and soon that includes the important laws, as well as the folderol. Meanwhile the courts are underfunded because Congress is focused only on fads d’jour. Justice is increasingly unavailable to anyone who is not rich.
It is not a happy state of affairs.
It is simpler than this. It is not a pure matter of economics, but about history and the function of the law. Wall Street walked off with FNMA’s securitization process essentially unregulated because the government wasn’t paying attention. It just let the private sector do what the government had done. Down to the very techniques, the mechanics. The SEC didn’t bother to lift a finger to look with its anti-fraud lens at either Fannie’s activities, or Wall Street’s in replicating Fannie. Yet the securities law requires such scrutiny in anything inherently subject to price manipulation and fraud. I worked in a Wall Street law firm with government connections in the early 80s when the legal community was scoping all of this out. The legal profession was well aware that CDOs and MBS and innovative financial derivatives were securities. The government was also so advised, but, apparently, into a black hole. Lawyers then hastened to help Wall St. evade the the spirit of the securities law by deep sixing any implication that onerous full disclosure, transparency and due diligence was required of them. Regulators were stovepiped in departments set up in the 1930s, reflecting the divisional categories of a simpler day.
The public assumes the government protects it, by virtue of how complicated everything all is, but the flip side of comprehensive complexity is that no one understands it. Bureaucracy drones on by rote. Underpaid relative to Wall Street, regulators need to be at the cutting edge of a changing field, but rarely are. Nor does the private sector care to cue regulators in, lest they come under the spotlight next.
Fannie’s securitizations were originally workable only because (a) Fannie always had strict rules guarding the quality of the loans in the securitization pool and (b) because of the 100% taxpayer guarantee, a promise that only works for the taxpayer if limited to a narrow category. Not expanded to cover anything and everything—and government always tends to replicate itself in the effort to justify its existence. Fannie was conceived as a national insurance monopoly. A development plan to help the US out of the Depression of the 1930s. It was never conceived as a market-based financial institution or operational insurance company. It wasn’t a business, insurance or otherwise, but a government program.
This government process involving securitization couldn’t be just handed over to Wall St., not unless Wall St. got heavy securities law scrutiny. Unfortunately the law tends to be a playground these days for sophists who run about asserting that black is white and 2+2=5. Let’s just say that anything complicated isn’t hard for an unscrupulous and well paid lawyer to tie up in knots for years.
Washington politicians looked only at the promoted upside, not the down—e.g., the magical properties of portfolio diversification. On this rationale, all of banking was allowed to merge and cartelize, starting in the 80s, as banking crises started to happen. As Washington rationalized it, with the aid of soothsaying bank lobbyists, absurdly large banking entities somehow “ensured” against risk, as opposed to creating insanely overlarge and unmanageable conglomerates. They also no longer had any interest in scrutinizing for quality. Quality was random walked out of the room as a consideration. Pooling, like a magic elixir, would meliorate all. Ironically banks imitated Washington, literally, in the sense of that warehouse at the end of the movie Raiders of the Lost Ark, where any toxic waste could be buried, with no one the wiser. Banks to some extent themselves may have been dumbed down by FDR’s securitization gambit to begin with, to become companies looking for the next guaranteed, easy-money paper pushing racket to wangle out of the government. The existence of Fannie meant banks no longer had to be market-disciplined, sharp-eyed lenders scrutinizing debtors for quality. Just machines focused on an algorithmic ticking of boxes, assembly line style. Boring zone-out operations based on a “business model” handed to them by the government, who itself stopped thinking about anything but following the template, decades ago. No longer having skin in the game changed their character. Inevitably, their talents and abilities declined, as their prestige of size, and arrogance over what now seemed magical (US guaranteed) money making skills rose.
Antitrust law was under a cloud for a generation, due to a fad in legal circles. Disparaging antitrust was in vogue due to a few ill-considered judge-ordered breakups and bad dicta in antitrust. But that didn’t mean antitrust and the principle of free markets and competition was dead. To be anti-antitrust became a narrative trope. The fad for deregulation also was misused by lobbyists promoting special interest legislation. Deregulation obviously doesn’t mean total regulatory abdication. Basic government services need to be done competently and in the public interest. Criticism of the government or the private sector is not ad hominem or per se. Regulatory laxity and ditching the public interest is not what deregulation calls for. The revolving door is always a corrupting force in government but the point of government reform is to cut fat, not arteries.
Narrative proclamations of law in no way insures that the stated conclusions will be enforced. At any moment in time government is fully occupied with whatever previous legislators heaped on their plate, and don’t have time for more. Time is money and any new major duty heaped on government, has to be paid for.
Regulators wound up declaring certain assets safe by law. But no asset can be “presumed” safe by “type.” A law declaring certain types of things AAA is a circular tautology, assuming a fundamentally economic conclusion that has to be market tested and now won’t be. Only market actors, not lawmakers, can make market decisions about pricing. And there is a limit to all government guarantees against loss. If the government is the ultimate guarantor, then it is the principal in the transaction, not the putative “private market” firm. FDR understood business better than politicians do today. He strictly limited what the government would guarantee. Washington today copycats FDR’s techniques in its affection for 30s era national insurance schemes. But they don’t follow FDR’s lead in strictly limiting their scope, or the behind the scenes imposition of rigorous rules selecting on a global basis for quality.
Today Congress, from the top, just manufactures moral hazard, merrily, without even recognizing that it is doing so. The basic point is that of the agency problem of economics. The integrity of an investment decision cannot be wholly trusted if the entity making it has no skin in the game. With no skin in the game you have to have absolute trust in their competence, good faith, and integrity. Rarely do such conditions exist. Our politicians are experts in faking it. The government had no basis on which to guarantee super high leverage on specific asset types. Having taken on full responsibility to guard market integrity for the nation, our government is to blame for the failure, but so is their partner, the banks. Today it is Wall Street who is the senior partner in the crony relationship with Uncle Sam. It was the expert in securities law, it must have known all along at some level what it was setting up, and at all points it proved to have no compunction about robbing the US taxpayer, for its own account.