Thursday, January 28, 2010

Well, He's Got the Right Idea...

French President Nicolas Sarkozy said the following at the World Economic Forum at Davos today...

"We are not asking ourselves what we will replace capitalism with, but what kind of capitalism we want?" he said.

"We must re-engineer capitalism to restore its moral dimension, its conscience,"

Ok, he's got the right idea here. Just because we hit an economic downturn does not mean we should start pushing towards socialist policies. In fact, moving away from such policies seems to be working in other places.

Now, what we need is not more regulation, but "good" regulation. We need current regulation to be simplified, clear, and transparent. The more you convolute something like this, the more loopholes you create for those who don't want to play by the rules to worm their way around the regulations in place. Both of our political parties seem to back regulation that apparently is too clouded in legalities that loopholes seem to be at every turn. Make it simple, make it clear, and make it so there is no doubt about what you are trying to accomplish.

This also naturally reduces and limits the amount of regulation you can implement, which is conducive to a well-oiled capitalist economy. You can only go so far without arousing protest from investors, businesses, banks, and the public at large (who probably does not understand a lot of the regulation to begin with, I know I have problems understanding some of the regulations I've looked up).

Granted, I would prefer minimalizing regulation, but since I have to play within the system (let's face it, most good revolutions do not happen overnight...unless you're talking Eastern Europe in 1989, but I digress), let's start by simplifying regulation first, then we can talk about what (if any) regulations are really necessary.

Also, taxing banks and big business as punishment will not be conducive to anything positive for the economy. If you thought big banks weren't lending before, watch what happens when you start penalizing them. If other states starting pulling moves like the state of Oregon just decided to do, you're going to see the leaders and drivers of free enterprise and industry start "going Galt" in huge numbers.


zen said...

"those who don't want to play by the rules"
Ha! The sad fact is that we need rules and regulations, or people cheat. In fact, people STILL cheat. The answer needs to include penalization and enforcement of the rules.

I felt the president made a great suggestion last night by saying that if banks that benefited from the bailout are able to start paying huge bonuses again, then they ought to be able to be charged to pay back the US taxpayers. Yet no Republicans confirmed agreement by applause. I was stunned.

The answer is not a clear capitalist, nor clear socialist path. Our nation has navigated a course between the two quite well for most of its history. It's ridiculous and sad that the label of socialism (Boo!) has become such a pejorative recently. So much so that often Tea-baggers don't seem to know the difference between any of their boogie-man terms. Aye politics...not government.

Phil Chroniger said...

The rules are easier to enforce if they are clear and simple, that is what I am suggesting.

See, the difference between the President's suggestion and my belief is that the banks should not have been bailed out in the first place.

And the label of "capitalism" has been a pejorative for many on the left for years, so that is ridiculous in and of itself, as well.

Our country works well with capitalism with a sprinkle of socialist-based ideals (social safety nets, etc...). I'm not a full blown voluntary-ist libertarian, I do believe in a small form of government that takes care basic things.

zen said...

"See, the difference between the President's suggestion and my belief is that the banks should not have been bailed out in the first place."

Okay. Accepting the reality that there was in fact a bailout, the responsible thing to do is to recoup those funds.

Phil Chroniger said...

In principle, I agree with you on that point. However, you run into a few problems here that have to be considered.

1) The bailout brought teetering financial from the brink. They are doing what the bailout was supposed to profitable.

Granted, paying out big bonuses the following year is just plain stupid PR and really ignorant (not to mention ethically unsound), but we do want these institutions to be profitable.

Washington cannot send the message that "yes, we want you to be solvent, but just barely enough", it is not conducive to any kind of positive movement in lending.

2) If you force the banks to pay back the funds too quickly, you're going to cut into the profitability, which only forces the bank to cut back it's lending.

3) We need to more bailouts. We've created too many moral hazards from bailouts and stimulus packages and the like. This is not just a recent deal, either. The moral hazard that came from the S&L bailouts in the late 80's is a key contributor to the risky behavior by lending institutions that led to the 2008 meltdown.

I have a feeling that the stimulus package may create a similar moral hazard for state governments, who feel that if things get too tough, the government should provide them with some "stimulus" to fund the projects they couldn't pay for themselves. It's a razor's edge we walk with such actions.

I remember when they first floated the idea of a bailout for the banks. I thought this was going to be more of a RTC-type of move. Resolve failed banks and insure deposits, while finding a more solvent institution whow as fit enough to take care of the failed bank's portfolio. I wasn't too thrilled about it, but I thought "I can live with this if they keep it controlled like in 1989." The "bailout" turned into what we now know as TARP, which I was totally against.

John said...

Obama's position is that all banks will be taxed. Not just those that received a bailout. Also most of the banks bailed out have repaid the U.S. Government with interest.

Secondary, why does Fannie and Freddie escape this tax since they are the biggest lenders of money in the corporate world and the primary cause of lending to un and under qualified borrowers. Let's look at the actions of those overseers of the Banks and other institutions and why they did not act or react to a pending crises.

Again we also have to look at how our government is giving away our money before we bitch about private banks and what they pay their employees. The 8 K that they give new homeowners does't go to reducing the mortgage so they can afford to make their payments. They can still be very marginal and still receive a loan of 100% of the sale price and after settlement they receive a check for 8K. The people I know who received this payment went out and brought furniture that they could not have afforded before their bailout. Let us bring Big Government under control before we try to run the private sector.

Before big government got involved (prior to the community reinvestment act). Borrowers needed a reasonable down payment and the ability to made their monthly payments.

Let's Be Free said...

The banking system is the grease that lubricates the cogs in the wheels of commerce. It stands behind the US dollar. As such it is not a zero sum game. The system adds value by operating smoothly and efficienty, allocating capital to the highest return activities, and (in the case of commercial banking) offering security and predictability of return for the ordinary saver. Looking at the banks as them, as in us vs them, is wrong headed.

As for taxing bank liabilities (Obama's proposal) anyone with even a modicum of accounting knowledge knows that for every liability there is a corresponding asset. In the case of commerical banking those offsetting assets are accounts -- savings accounts, checking accounts and money market accounts. Accounts are maintained by ordinary people saving money for a rainy day, to fund their children's education or their own retirement, or make major purchases in their journey through life. Obama's proposed tax directly falls on these savings -- no pass through is necessary for the direct hit. In Obama's obsession with using taxes to punish bankers he would in fact punish exactly the people and behaviors that we want to protect.

Two types of regulation or re-regulation are needed. First, requirments relating to disclosure of around a full range of securities and instruments. For example, probably no one, including its directors, understood the degree or extent of AIG's credit default swap holdings. I maintain, that with strong disclosure requirements, AIG may never have gotten into a position where it became ground zero in the crisis. Shedding the light of day changes behaviors and prices risk more realistically.

Also, we need to go back to structural separation of commercial banking and investment banking activities. It has been stated by many, legitimately, that the governent, in the name of creating and protecting the dollar, should not be in the business of backstopping financial insitutions whose speculative trading has gone bad. Less understood, and probably more important, is separation of functions within the financial sector (that results from Glass Steagal or something like it) will mean that more transactions along the value chain are done at arms's length, with competition and customer/supplier accountability demands providing checks at additional points in the process.