Wednesday, February 22, 2012

License to Fail

We're beginning to hear a lot more cheek of late from the anti-regulation circus. The rhetoric pretty much all centers around a fundamental error of bivalent thinking: "Regulation bad! Freedom good!" As if that were a reality-based dichotomy.... This post will serve as a kind of final pass through that territory for me, with maybe a couple of asides, before I try to put it down for awhile.

Before the the financial system got wrapped around the axle of the global economy, this kind of naïveté might have been understandable, given the money and effort that was sunk into the propaganda organ of deregulation's beneficiaries, but not today. What most people didn't seem to remember before the crisis--and still seem to have difficulty getting their heads around now--is that in order to have a robust and sustainable economy, you need both a sensible rulebook and a consistent, reliable system of enforcement. We hadn't been bitten this hard since the thirties, so people had forgotten how bad it could get. (Many were also apparently laboring under the impression that their social security, medicare and medicaid assistance were brought to them via the beneficence of some kind of heaven-sent, currency-laying waterfowl, so maybe that's not such a surprising lapse.) There seemed to be no appreciation of the concept that if something is not forbidden by law, then it's permitted here (thank you John Locke); and if people can make money at it, they'll be lining up to do the hell out of it--even if it torpedoes the system that underpins their livelihood. But hasn't that lesson been duly delivered by now?

To take just one well-known example, The Banking Act (Glass-Steagal), which passed in 1933, was put in place for good reason. The financial system had just taken a dump on America's dinner table, and people had understandably lost their appetites. Among the smarter things that legislation did was to erect a barrier between commercial and investment banks. Customers who deposit money in their trusty Main Street bank don't want it jeopardized by, say, the activity of crack-fueled speculation in Manhattan. And since the FDIC wasn't designed to cover the bets of the casino capitalists, guess who catches the tab when we drop that fence and those yutses scramble in and start breaking things? A clue: not them. The capital gains tax is still at a measly 15%. And on top of that, the serious royalty can afford to retain small armies of well-compensated tax and finance lawyers (preferably poached from the IRS) to find creative ways to exploit the loopholes their lobbyists have thoughtfully purchased for them with the coin they banked from their last tax "rescue."

Not so awfully long ago, we lived in a country where the more successful among us were contributing back to the system that made that success possible at a level at least *arguably* commensurate with the up-tick in their (still briskly increasing) fortunes. That allowed others to come up from below and emulate their inspiring example. Not this time. They've pulled the ladders up after themselves over the past couple of decades, so they can sit in their penthouses and smoke the spliffs they've rolled with the social contract.

The repeal of Glass-Steagal in '99 was indeed part of what did us down, but that was just one of the more visible pieces of a huge, unprecedented and astonishingly well-funded campaign to roll back vast swaths of safeguards and protections. This effort wasn't launched to secure any additional or substantive freedoms for you or me, whatever the rhetoric may have sounded like at the time, and it certainly hasn't done so. What it did accomplish was the consolidation of financial--and consequently political--power among a much smaller and wealthier cohort and solidify already challenging barriers between socioeconomic strata. Of course, it also supplied that much-needed little boost of confidence for the small minority of nervous winners whose fortunes were already climbing so quickly they had to yawn every thirty seconds to equalize the pressure in their ears. That's where the benefits of this new-found freedom went and continues to go. Real wages have been stagnant or decreasing for most Americans for decades, and social mobility is a receding dream to anybody who cares to run the numbers.

Poor lending standards and lax enforcement were also a big part of the dumfuquerie that compounded our vulnerabilities leading up to this recent shitshow. But think about where that "anything goes" climate blew down from. What do you tell the suits upstairs when they need more paper for their mortgage Cuisinart (it slices, it dices, it wipes away risk...). "Don't you worry your little pomaded pompadour about the niggling trivia of employment or credit history--when Wall Street sees the ribbons and wrapping paper our rating agencies are gonna slap on this stuff, they'll be stepping on their dicks to get a piece!" Turns out that's exactly what happened.

And if you mumbled unseemly dissent while that pipe was making the rounds you were promptly disinvited to the party. Nobody likes a buzzkill. Come on, show some perverse incentive...

Smart legislation provides both the structure and immune system of a healthy economy, much in the way that the sensible bits of the rest of our legal framework protect, say, our bodies, our voices, and our right to feed and exercise our personal beliefs unmolested by pitchfork-wielding heretics who think we're the Antichrist--or worse still, socialists! Like the immune system, regulation has to keep pace with threats to the health and integrity of the economy. Like the immune system, misplaced or excessive regulation can deprive an economy of its vitality. But smart regulation fosters robust and healthy competition, innovation and broadly shared rewards. Strip it out and you get what we enjoy today: runaway systemic risk, anti-competitive practices, frozen socio-economic strata and astronomical rewards shared by a tiny sliver of the productive population while the rest of the country withers on the vine. That ain't even a little bit ethical. Maybe we're ready for another round of vaccinations....

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