Trust but Verify

by Eric Martin

Quelle surprise:

A Senate panel investigating the causes of the nation's financial crisis on Thursday unveiled evidence that credit-ratings agencies knowingly gave inflated ratings to complex deals backed by shaky U.S. mortgages in exchange for lucrative fees.

The Senate Permanent Subcommittee on Investigations will hold a detailed hearing on Friday, where its chairman, Sen. Carl Levin, D-Mich., will introduce e-mail records in which executives from Standard & Poor's and Moody's Investors Service acknowledge compromising the integrity of ratings to win business from big Wall Street firms.

"They did it for the big fees they got," Levin told reporters on Thursday after outlining the broad strokes of what he'd pursue Friday when he puts current and former ratings agency officials on the hot seat.

The documents to be released Friday confirm what a McClatchy investigation revealed in October _ that pressure from top ratings-agency executives to retain market share and the fees that it brought meant that ratings on complex deals were malleable. Some fees were as high as $1.4 million.

Investors trusted ratings to give them guides to the quality of financial products such as bonds, but many of the bonds rated as top-quality in the recent crisis turned out to be junk. The fallout was a housing collapse that triggered a global financial crisis.

This type of fraud is nothing new, and will occur again with increasing regularity unless real regulations are put in place - with actual teeth - in order to curb bad behavior.  The allure of multi-million dollar fees is too great to rely on the willpower and better angels of the actors involved to ensure good behavior.  Recognition of the irresistible allure of power and money, and the frailty and corruptibility of humans, was forefront in the minds of the framers when drafting the Constitution and crafting the system of checks and balances that form the backbone of our political structure. 

 

The same principles should guide the implementation of common sense reforms and regulations.  Unfortunately, the same enormous sums of money that lead our financiers astray greatly influence and distort our political process, so what we are left with is in terms of reform at this juncture is a Democratic package offering decent but still too tepid fixes, and a Republican Party engaging in Orwellian doublespeak that accuses the reform package of doing the exact opposite of what it achieves. 

 

Obviously, reforms and regulations can be taken too far, but that has not been a recurring problem plaguing the U.S. economy in recent decades.  Quite the contrary, it has been slack regulation that has allowed for serial gaming of the system, often with catastrophic results, dating back to the first major stock market crash almost a century ago.  While legislation had been applied as prophylactic, the repeal of Glass-Steagall once again exposed vulnerabilities.

 

The credit agency fraud referenced above (and the related Goldman Sachs malfeasance) is not unlike the spinning, laddering and pumping scandals that rocked the big investment banks circa the tech stock bubble bursting of approximately a decade ago (as discussed here).  The next time will be no different but for the details unless the Democrats (and maybe even one or two Republicans - wouldn't that be nice?) get serious about establishing parameters that better ensure greater transparency and fair play. 

 

A well-conceived, rules-based framework would, in itself, encourage healthy investment - both from domestic and foreign sources - as investors could have restored faith in the markets as sound vehicles for realizing returns on investment, rather than exotic speculative gambling parlors with increasingly esoteric vehicles that can payoff big when you're "in the know" about the latest racket, but can bankrupt the unsuspecting and lead to global calamity when the cards come tumbling down. 

 

And the cards always come tumbling down when the only real checks on the system are the good faith of bankers, investors and financial institutions with all those billions of dollars sloshing around before their eyes.

Comments

[Sebastian]

I agree with this post, but I don't understand why we have so many other disagreements if you believe "Unfortunately, the same enormous sums of money that lead our financiers astray greatly influence and distort our political process".

This is true for all large government regulation. This is why we have farm subsidies, rent control, the Chrysler/GM bailout, and really stupid military expenditures that even the military itself doesn't want.

What makes you think that this dynamic is/will be under control in giant new areas of spending, like HCR?

What steps are Democrats taking/you advocating to minimize it in HCR?

And I'm not saying that there shouldn't be regulation. I'm saying that this critique should be foremost on our mind in almost every single discussion about how the government functions in the real world.

[SFAFan]

What steps are Democrats taking/you advocating to minimize it in HCR?

Now that HCR's the law of the land let me suggest that our entire government work together to ensure it works properly.

[Eric Martin]

This is true for all large government regulation. This is why we have farm subsidies, rent control, the Chrysler/GM bailout, and really stupid military expenditures that even the military itself doesn't want.

I'm opposed to almost all farm subsidies, and you know my position on stupid military expenditures. But I agree, those lobbies are extremely powerful, and their money and influence distorts political outcomes.

Rent control, I'm a bit ambivalent about, and not sure what the big money enticements are there - renters corrupting the political system with their collective lobbying efforts? Seems like the landlords have greater ability to distort outcomes.

As for the Chrysler/GM bailout, it seemed to have harsher terms for the participants than the Wall St bailouts - unionized workers got hit pretty hard, and their contracts voided, while financial institution contracts were treated as sacrosanct. But I think that the money and influence of Detroit might have softened the blow for them still.

What makes you think that this dynamic is/will be under control in giant new areas of spending, like HCR?

Oh, I absolutely guarantee that enormous amounts of money from big pharma distorted the political process involved with HCR. The rational approach would have probably been either single payer, expansion of Medicare or some type of tightly regulated private hybrid as in Switzerland.

Instead, we got some Big Pharma watered down bill that was better than the status quo ante, but fell short by a lot.

What steps are Democrats taking/you advocating to minimize it in HCR?

Time will tell, as many of the particulars need to be fleshed out by HHS. Hopefully, the distorting effect of Big Pharma's money can be shut out somewhat, as it's more of a cabinet level, rather than legislative, process.

[John Thullen]

What steps are corporations, unions, and other parties taking to minimize the distortion of our political process?

I'm not sure why politicans and government officials are expected to eschew all human frailty for the good of the country but lobbyists are under no such demands.

Distorting the political process is what Americans do, especially the newly christened "citizens" under Citizens United.

How about Democrats legislate and everyone can shut their faces.

[Sebastian]

"Time will tell, as many of the particulars need to be fleshed out by HHS. Hopefully, the distorting effect of Big Pharma's money can be shut out somewhat, as it's more of a cabinet level, rather than legislative, process."

This is a deeply weird response. Why the focus on bit player pharma? How about doctors and hospitals? They are where the big money is. You could reduce pharma profits to zero (literally zero, as in make it so that creating pharamceuticals never made anyone a cent of money) and you would barely touch the spending gap caused by doctor's pay differentials between the US and the rest of the world. Same with hospitals. I submit that worrying about pharma is likely to get get you less money saved, and larger actual negative medical ramifications than almost any major thing you could possibly focus on in health care reform.

It is like Republicans and earmarks: it makes a nice soundbite and has almost no practical value on the budget.

[Nate]

Sebastian: Your argument seems applicable to any large concentrations of money/power at all, not just government. Large sums of money distort political, social, any kind of process. So why do you object just to government? Why not talk about some way to keep EVERYTHING smaller than some arbitrary size?

Cutting "big government" in favor of just handing things over to giant corporations who are at least as corrupt as the worst excesses of government doesn't seem to get us anywhere. Especially when despite the claims of "the magic of the market!" giant corporations are far LESS responsible or accountable to the citizens of this country.

The whole "government is evil because it's big and the rules get captured by corrupt interests" doesn't make a very good argument against government, because what would the alternative be? Corrupt interests doing as they please, without government's help, or hindrance, and with less accountability.

That's one libretarian argument I've never gotten. It seems very Underpants Gnomes. Step 1: Get rid of government influence that's captured by corrupt interests. 2: ??? (Magic of the marketplace) 3: No corruption or taxes!

[Marty]

"How about Democrats legislate and everyone can shut their faces."

Because "everyone" does not believe that:

Republicans = bad politicians and
Democrats = good politicians

or the opposite.

just because different politicians spend too much on different things doesn't make one better than the other.

[hairshirthedonist]

just because different politicians spend too much on different things doesn't make one better than the other.

The "just" in this sentence carries a heavy load.

[Eric Martin]

Seb, you're right. It was sloppy shorthand. Please read that to mean the entire health industry lobby.

[Sebastian]

"Sebastian: Your argument seems applicable to any large concentrations of money/power at all, not just government."

Sure.

"Why not talk about some way to keep EVERYTHING smaller than some arbitrary size?"

Absolutely! I'd be thrilled to get behind this if it really were a liberal-in-the-US concept, or even a sort-of talking point.

But as we see from Eric, his idea is that the best way to have avoided capture was to have the government take over nearly the whole thing. Though how that avoids capture is left a mystery.

Which isn't the same as your proposal at all. And, I strongly suspect that his approach is more characteristic than yours.

[Eric Martin]

But as we see from Eric, his idea is that the best way to have avoided capture was to have the government take over nearly the whole thing. Though how that avoids capture is left a mystery.

I don't think I mentioned capture really. The best way to administer health insurance is probably single payer, or a swiss hybrid model with a robust public option.

I'm not addressing capture in particular.

[Sebastian]

"I don't think I mentioned capture really."

"Unfortunately, the same enormous sums of money that lead our financiers astray greatly influence and distort our political process"

And your response to "What makes you think that this dynamic is/will be under control in giant new areas of spending, like HCR?"

was:

"Oh, I absolutely guarantee that enormous amounts of money from big pharma distorted the political process involved with HCR."

and

"Instead, we got some Big Pharma watered down bill that was better than the status quo ante, but fell short by a lot."

and

"Hopefully, the distorting effect of Big Pharma's money can be shut out somewhat, as it's more of a cabinet level, rather than legislative, process."

So either you're misinterpreting what is meant by capture or I am. Because my understanding is that you just mentioned it a lot while at the same time focusing on one of the smaller players in the public choice problem/capture problem with the pretty strong insinuation that you were identifying one of the major ones.

And further, you are misidentifying how it works if you think the administrative agencies are *less* prone to it. They are at least as, if not more prone to it (which is why the SEC and the FCC are often thought of as classic examples of regulatory capture, and on the left the NLRB is used as another example). [also note these examples were captured under a pre-Citizens United rule, because capture isn't largely about vast money-spending]

[Eric Martin]

Perhaps I'm not responding directly to your version of capture, but I don't think you made it clear exactly what you were asking.

...focusing on one of the smaller players in the public choice problem/capture problem with the pretty strong insinuation that you were identifying one of the major ones.

Jeez Seb, I did correct myself. I'm not flawless, but if you point out some sloppy shorthand, as you did with "Big Pharma", and I take the time to correct the error (as I did), the least you could do would be to acknowledge that and not return to square 1.

And further, you are misidentifying how it works if you think the administrative agencies are *less* prone to it. They are at least as, if not more prone to it (which is why the SEC and the FCC are often thought of as classic examples of regulatory capture, and on the left the NLRB is used as another example).

Well, that depends on which administration is filling out the ranks of each agency. But look, I don't think the influence of the health care industry has been washed away by delegation to HHS, but I know the legislation would have been impossible to pass if what I hope to see in it from HHS is in fact put in it. I'm hopeful that Sebelius will be able to add heft to the provisions in a pro-consumer fashion.

But, yeah, part of my beef with Dodd's bill - and the GOP's requests for consumer protection - is that they're folding the consumer protection groups under the Fed.

[Nate]

"Absolutely! I'd be thrilled to get behind this if it really were a liberal-in-the-US concept, or even a sort-of talking point."

I had no idea you were an anarchist, Sebastian.

It's not really my proposal, I was extrapolating from what you'd said, to try and understand your meaning. If regulatory capture is your biggest worry, then the solution is more accountability, not simply saying "Welp, government can't do anything right." We can't just say "Well, this solution has this problem, let's not do it," if the status quo has a bunch more problems.

Do you think the spectre of regulatory capture is worse than the situation without the health care bill, or a financial reform bill?

[Rob in CT]

I have to say... I want some punishment of the ratings firms. The CEOs who fudged the ratings to enrich themselves? Massive fines plus jail time, please.

Make some examples.

[Carleton Wu]

And I'm not saying that there shouldn't be regulation. I'm saying that this critique should be foremost on our mind in almost every single discussion about how the government functions in the real world.

You seem to be saying that we should regulate intelligently. Maybe with open processes that allow everyone to see influence being exerted.
Or is there more? Because if that's what you're saying, I don't see anyone disagreeing with that. On the other hand, I don't see that as the sort of position that rules out many of Eric's other positions, despite your apparent surprise in the first comment.

[Eric Martin]

And I'm not saying that there shouldn't be regulation. I'm saying that this critique should be foremost on our mind in almost every single discussion about how the government functions in the real world.

I would also argue that this was the point of checks and balances and elections and Consitutional rules. Was to try to mitigate for these obvious influences.

My point was that we should apply the philosophy behind dissipation of power in political structures to financial systems.

But, yeah, I'm all for remaining vigilant in each context that power is dissipated. Interestingly, one of the ways of putting a check on private sector abuse of power is through the government. Regulation in this context.

[Sebastian]

"Jeez Seb, I did correct myself. I'm not flawless, but if you point out some sloppy shorthand, as you did with "Big Pharma", and I take the time to correct the error (as I did), the least you could do would be to acknowledge that and not return to square 1."

Sorry I didn't see your correction comment until now. I saw your other comment (right after that) and didn't look up further.

[Eric Martin]

Unlike you, I know how to accept an apology/correction ;)

[Sebastian]

"You seem to be saying that we should regulate intelligently. Maybe with open processes that allow everyone to see influence being exerted.
Or is there more?"

Hmmm, I wouldn't really phrase it that way. One of the biggest areas where I think that governments can effectively regulate without taking over the field is by enforcing transparency. Lots of government proposals to 'put a check on private sector abuse of power' end up just having government inhabit the field such that there isn't much check on government power. In regulatory concerns this often ends up being captured by the currently powerful corporations which then use the governmental power to squelch competition that they never could have squelched with just 'private sector abuse of power'. See for example the FCC, or car companies regulating away Japanese competition for decades.

[Eric Martin]

In the present example, forcing banks and shadow banks to treat these exotic debt instruments as actual liabilities for capitalization purposes would have achieved a lot.

Actually enforcing fraud, with stiff penalties, as with Goldman and the rating agencies would also help.

Transparency is also, almost as a general rule, a good thing.

SEC disclosure requirements are part of what make US markets such an attractive place to invest.

But if those documents can't be trusted...

[Phil]

This is a deeply weird response. Why the focus on bit player pharma? How about doctors and hospitals? They are where the big money is.

Maybe because . . .

2009 Lobbying Money Spent:

Pharmaceuticals/Health Products $263,377,975
Hospitals/Nursing Homes $107,106,372
Health Professionals $84,606,162
Health Services/HMOs $72,703,045
Misc Health $10,348,155

[Sebastian]

"Well, that depends on which administration is filling out the ranks of each agency."

Actually, public choice investigation has pretty much shown that it doesn't. It depends mostly on how long the agency has been around. The longer an agency has been around the more likely that it has been captured. (See for example the military industrial complex). This tends to be overcome only by incredibly strong incentives in opposite directions (ie not wanting to be the FDA reviewer who authorizes thalidomide) which causes perverse results in other ways--ask HIV+ people who couldn't get experimental meds fast enough in the 1990-1994 period. Or rather don't ask them, since it took about two hundred thousand of them dying needlessly before the FDA was willing to seriously consider the concept of fast tracking.

[Eric Martin]

Yeah but Seb, the Bush years were an outlier then, because there was a severe gutting of the administrative state.

[Ugh]

The Bush years were a tour de force on how if you're willing to appoint naked political operatives who don't give a damn about the rule of law or the mission of various regulatory agencies to high positions you get away with just about anything. And, for the most part, they did.

[Sebastian]

"Yeah but Seb, the Bush years were an outlier then, because there was a severe gutting of the administrative state."

I'm not sure what you are referring to here. Public choice and regulatory capture was well understood and investigated before the Bush years. "Military Industrial Complex" suggesting capture predates either of our first breaths. The FCC has been a mess for decades. The auto games I mentioned are from the 1970s. Which part is just Bush? Or mostly Bush?

Phil, you are making the typical mistake that money is the only denomination of influence. Pharma spends more than doctors because the medical associations already have enormous pull in the HSS and Congress (see for example the yearly Medicare 'fix'). See also how European political games get played--only rarely does it have to resort to mere money. The AMA has MUCH more influence than all of Pharma together.

Furthermore, I don't know where you get your numbers, but they appear to be off. Opensecrets.org puts Healthcare professionals at about $95 million for 2008 election cycle and $31 million for the 2010 election cycle.

Hospitals at $23 and $8, same period.

Pharma (including vitamins and supplements BTW) at $29 and $11 same.

Every election cycle recorded they spent about 1/3 of "Healthcare professionals".

Actually on second look, I can find your numbers on opensecrets.org in the individual category, but if you set them to 2008, or 2006 they don't match the industry comparison numbers, so I'm not sure what is going on there. But in the industry comparison numbers, it would appear that Health Care professionals spend more than Pharma on a regular basis, and in 2009. There may be some methodological quirk I need to have explained?

For what I'm looking at see here and you can vary the "Industries in this sector tab". I think you are looking at this and I don't know why the different reports come up with radically different numbers. (Health Care Providers in the second report for 2008 show as $78million while for that same year on the industry comparison lists it shows $95million)

[cleek]

The Bush years were a tour de force on how if you're willing to appoint naked political operatives who don't give a damn about the rule of law or the mission of various regulatory agencies to high positions you get away with just about anything.

once again, we have failed Conservatism.

[russell]

I take the point Sebastian is making throughout this thread.

What I have to say in response is this:

Government needs to be at least as large and at least as powerful as the public institutions its required to govern.

If it isn't, they win, and the country runs in their interest.

Any large institution is prone to stupidity and inefficiency.

If we want a small, efficient, lean and mean government, less prone to stupidity and inefficiency, we need to also scale back -- by law -- the size of the private institutions that require governing.

[Michael Cain]

Rent control, I'm a bit ambivalent about, and not sure what the big money enticements are there - renters corrupting the political system with their collective lobbying efforts?

Regardless of their origins, the staying-power of policies such as rent control and residential property tax controls is that they benefit the elderly. Supporters of many of the controls were up-front about them from the very beginning: eg, the stated goal of various property tax controls was to keep increasing tax payments from pricing Granny, with her fixed income, out of the house where she had lived for the last 40 years.

The elderly are a very large and influential lobby. While I was on the permanent non-partisan staff for a state legislature, I had plenty of chances to watch it in action from up close.

[John Thullen]

Sebastian's posts and commentary are thoughtful and rational, sometimes to a fault.

The opposite of mine, which are odd and irrational, always to a fault.

I don't know what it is -- when I'm confronted with a pure rationality, the Daffy Duck (and the Marx Brothers) in me wants to bounce up and down and disappear hooting into the distance and return downstage to mess up everyone's hair.

Where did anyone ever get the idea that Democracy (a Republic with checks and balances which causes everyone involved to spend most of their time watching everyone else, and the rest of their time whining about being watched, all in their perceived self-interest)is a rational form of government and that its irrationality can eventually be addressed.

So enough about Sebastian. What about me?

I don't think too many folks in the country want the government, at any level, to be efficient. We prefer Barney Fife to the KGB or the Stasi. The latter two have their bullets at the ready and can pretty much get the job done without a lot of inefficient fumbling about and bullets shooting out the overhead light.

Also, I understand the meaning of "lean" in "lean and mean" but what the hell does "mean" mean?

Does it mean "to have in mind; intend; purpose" or "to have a purpose or intention in mind: chiefly to mean well, to have good intentions"?

Nah.

How bout "low in quality or grade; poor; inferior" or "low in dignity, unimposing" or "poor in appearance; shabby", or "ignoble; base; small-minded; petty", or "stingy ,miserly, penurious (O.K. I can see that will get a vote or two from the usual suspects), or "bad-tempered; vicious; unmanageable:, or "hard to cope with", or "skillful, expert".

Hmmm.

Or does it mean: "medium, average middling, what is between two extremes" or "moderate".

Yeah, right.

This is related to "do more with less", which is something always said by rational people to irrational people who answer, "No, you get less with less. You want more, pay me more and give me more."

It's simple, irrational math.

No wonder Frank Luntz so easily f--ks up the language.

As for "less prone to stupidity and inefficiency" .... hoot, hoot, a snapping of your bow tie, your hat swiped from your head and returned quickly, but on fire, and your hair shaped into a question mark with the help of a jar of duck fat.

But I agree with Russell.

[Jesurgislac]

I don't know what it is

...but whatever it is, may it never, ever run out.

[JanieM]

Boston area ObWi folks -- dinner at http://www.daedalusharvardsquare.com/>Daedalus Monday, 4/26, 6:30 p.m.

Write to

ObWiBoston at gmail

if you have questions or to say you're coming, so if you're new we can devise a way to recognize each other..

[Phil]

Phil, you are making the typical mistake that money is the only denomination of influence.

No, I was assisting Eric in answering the question that was asked of him, which was, "Why the focus on bit player pharma? How about doctors and hospitals? They are where the big money is."

Your question specified we were talking about "where the big money is." Had you asked a different question, I might have responded differently.

But thanks for responding by telling me what I think instead of asking. AGAIN. Is there any chance whatsoever that, before one of us dies, you could, you know, not do that anymore?

[bobbyp]

What steps are Democrats taking/you advocating to minimize it in HCR?

Many Democrats, even self styled "progressives" are joining with the irresponsible deficit terrorists like the Pete Peterson Foundation to undermine future social spending. My Congressman and our esteemed president appear to have both fallen for this scam.

[bobbyp]

"This is true for all large government regulation."

As in lengthy? Large print? As opposed to "small" government regulation? Like speed limits? Depends upon the meaning of "all"?

[liberal japonicus]

Russell, that's a good point. Also, government growth doesn't take place in a vacuum. The three biggest events for government growth were probably the Civil War, WWII and the Cold War. You might want to assign the Great Depression (where the absence of any government action exacerbated the situation) as a run up to WWII, but in all these cases, it wasn't a case of government just growing, but because of structural reasons it had to expand. Given that the advances of the future are most likely going to driven by economics of scale, it is unrealistic to call for some sort of shrinkage in government as a solution.

[Sebastian]

"But thanks for responding by telling me what I think instead of asking. AGAIN. Is there any chance whatsoever that, before one of us dies, you could, you know, not do that anymore?"

I leave it to other readers to decide if my response was unfair in some substantive way or if Phil is just being dramatic.

liberal_japonicus: "The three biggest events for government growth were probably the Civil War, WWII and the Cold War." Don't forget the War on Terror. It did a lot to break down all sorts of safeguards.

[Jesurgislac]

Sebastian: if my response was unfair in some substantive way or if Phil is just being dramatic.

You claimed that hospitals/doctors were where "the big money is". You were wrong about that, as Phil pointed out to you.

You responded to Phil with a typical goal-post moving tactic "oh it's not about the money".

Phil did get pretty dramatic pointing out to you that, once again, when you'd been wrong on facts you'd just moved goalposts. I don't know why he felt it necessary to get dramatic on this particular occasion: we should all be used to it by now.

[RobW]

So, by MichealCain's example above, the purpose of rent control was stated upfront, to benefit a particular constituency, the elderly. Enough of the non-elderly agreed to give the old folks a break, or not enough non-elderly cared enough to oppose it, so that the laws got passed. How does this constitute "regulatory capture" and not just plain old democracy in action? Consider how much landlords and developers want to get rid of it and how hard they fought it in the first place.

See for example the FCC, or car companies regulating away Japanese competition for decades.

The FCC? Near as I can tell, the single best thing the FCC has done for the largest communications companies has been to de-regulate ownership. This has allowed the biggest corps to get bigger by buying up all the littler ones and use monopoly power to keep out competition. How is deregulation regulatory capture?

And the auto companies? Really? Is there a surfeit of Toyotas and Hondas in your neck of the woods? If the intent was to keep out foriegn competition, it's done an awfully lousy job of it.

Are you talking about safety and emmissions regs? US safety standards are the highest in the world, requiring extensive crash testing. This means building and wrecking dozens of expensive prototypes. US emmissions standards are actually higher than most of Japan, and harder to meet due to the inconsistent and comparatively poor quality of our fuels. Getting a new engine EPA certified costs 10's of millions of dollars.

Now, such regulations do work to keep out smaller companies, but they do nothing to keep out foriegn companies. Cconsider the lengths the US auto industry went to to fight any and all US safety and emmissions standards; do you suppose they secretly wanted them all along? A pretty well-kept secret, I'd call that.

Further, those regs actually do serve a fine and useful purpose to the general public: our cars are all now much safer and cleaner, in spite of the lobbying against those regs by manufacturers. If anything, I'd call those an examplary use of government regulation of industry to the public's benefit and at industry's expense. The legislature acted under public pressure and against the industry's wishes. Not regulatory capture at all.

(For a better example of regulatory capture in the auto industry, look to the dealers' associations actions at the state level.)

As for your passive-aggressive response to Phil: if you think he's being dramatic, just say so. Don't blame your opinion on "the readers." What you (I mean you, not "the readers) are calling "dramatic" looks to me like exasperation.

I do congratulate you on your initial response though. Instead of discussing the actual topic of the original post, you questioned the nature of government regulation and even of government itself. Instead of sticking to his topic, Eric Martin walked right into it. As a result, this thread says nothing about his specific recommendations for regulating the finance sector.

Nicely done. It's rare to see goalposts moved so far and so fast.

[Phil]

Don't worry, Sebastian. I'm sure the lurkers in email support you.

[Chris J]

"Don't worry, Sebastian. I'm sure the lurkers in email support you."

Not this lurker. It's interesting to me how discussions of the pros and cons of a particular government intervention are immediately swamped by the meme of "everybody knows government can't do anything well." Except of course military policy and defense -- in that area suddenly things are just fine. As Rob points out, government actually does (and has done) quite a few things well.

[CharlesWT]

Government could do even better if government employees were issued terabyte drives load to the rim with porn so they don't have to waste on-the-job time downloading it from the Internet.

[Chris J]

"Government could do even better if government employees were issued terabyte drives load to the rim with porn so they don't have to waste on-the-job time downloading it from the Internet."

And, of course, such things never, ever happen in the private sector. Which is why it's so efficient, I suppose.

[John Thullen]

CharlesWT:

I'm a Federal government employee and I've worked with government employees for years and I've never witnessed anyone downloading porn ...

I'll tell you what .. go fuck yourself, asshole.

Are you jacking off at home or is this getting through the server at work?

[bobbyp]

Seb sez: "...and on the left the NLRB is used as another example (of regulatory capture)".

Unions have captured the NLRB, or management? In context this claim seems to imply unions have captured the agency, which is frankly absurd beyond belief.

[bobbyp]

Back on topic: Eric concludes, "A well-conceived, rules-based framework would, in itself, encourage healthy investment..."

Well it wouldn't hurt, but remember that "animal spirits" thing. I believe Keynes mentioned it a couple of times.

[russell]

The discussion of regulatory capture, the proper size of government, etc etc etc is kind of interesting, but what nobody seems to be addressing here is the fact that the ratings agencies abetted a fraud that cost the nation as a whole billions of dollars. Billions.

In China, they take you out back and shoot you in the head like a freaking rabid dog for pulling crap like that.

Two or three of those and government wouldn't need to be very large at all. It would just have to shoot straight.

But we don't roll that way, for good or ill.

Everything in this country -- not just government, but every freaking thing -- is biased to the advantage of capital. I'm sure that statement will bring objections from some folks here. That's too freaking bad, because we're not going to sort crap like this out until that bias is corrected.

The securities ratings agencies are, if I'm not mistaken, publicly traded companies. That means they operate under a charter granted by some state government. They're not freaking people, they have no inalienable rights, they are a legal entity chartered by various state laws to carry out certain activities.

In the case of the ratings agencies, those activities are to evaluate the soundness of securities offered for public sale.

They utterly failed to carry out that activity in an honest and responsible way.

In short, they freaking lied to enrich themselves and they co-conspirators.

IMVHO what should happen in this case is the following:

1. The charter should be rescinded, and company dissolved and sold off for parts
2. Any funds recovered should be given as partial compensation to the folks harmed by the fraud
3. The stockholders of the ratings agencies should lose their entire investment
4. The principals of the companies, including all C level executives and all members of the boards of directors, should be fired immediately, and should never be allowed to hold any position of fiduciary responsibility again, ever, for the remainder of their natural lives
5. If any individuals can specifically be implicated in illegal activity, they should go to jail and do hard freaking time for a period of time measured in decades

These people abetted an egregious fraud that cost the nation billions. That is not capitalism, it's not the free market. It's a con. It's gangsterism.

Crush them like bugs. Visit financial and personal ruin on them. Make them pay in a coin they will regret losing.

Do that a few times and government will not really need to be all that big.

We don't need a overly large or complex government. We need a government that has teeth, and balls, and that will act.

Seriously, the banksters are predators. Take their freedom, and take their money, and take their ability to ever handle anybody else's money again as long as they live.

Do that a few times. Make some spectacular examples of a few of the most egregious SOBs and the rest will get the message.

Then we won't need a great big government at all.

What we need is good aim, and we'll be all set.

[Sebastian]

"Unions have captured the NLRB, or management? In context this claim seems to imply unions have captured the agency, which is frankly absurd beyond belief."

Ummm I was implying that many on the left think the NLRB has been captured by the management side. Which is probably why you thought the other idea is absurd. And of course the fact that you thought THAT idea was absurd, because you think it was captured by management rather proves my point. Thanks!

Phil, you've got Jesurgislac and someone I've never heard of (but who has trouble with the idea that the US automakers worked successfully against the Japanese for decades by citing now instead of wondering about the 1970s?) on your side. I'm completely underwhelmed.

[Sebastian]

"As for your passive-aggressive response to Phil: if you think he's being dramatic, just say so. Don't blame your opinion on "the readers." What you (I mean you, not "the readers) are calling "dramatic" looks to me like exasperation."

Umm. That wasn't passive aggressive. But if you want painfully clear: He is a drama queen. That is pretty much all he ever does in threads. I'm not sure he has ever seen a statement he can't overreact to. And as part of his overdramatic fits he has repeatedly claimed he won't ever respond to me again. Which well, you can see the result of.

[bobbyp]

Seb sez, "And of course the fact that you thought THAT idea was absurd, because you think it (the NLRB)was captured by management rather proves my point. Thanks!

Well, you don't have a point to begin with, and to say the NLRB is not a 'captive' of the unions is not the same thing as claiming they are captive of management (and you claim to be an attorney, snicker), though under Bush II they pretty much were, proving you really don't know what your are talking about.

So thank you....

[JanieM]

He is a drama queen. That is pretty much all he ever does in threads.

Phil's first comment in this thread:

Maybe because . . . 2009 Lobbying Money Spent:

Pharmaceuticals/Health Products $263,377,975
Hospitals/Nursing Homes $107,106,372
Health Professionals $84,606,162
Health Services/HMOs $72,703,045
Misc Health $10,348,155

Posted by: Phil | April 23, 2010 at 04:23 PM

Seems pretty undramatic to me.

[Sebastian]

Try the second one Janie. That is the drama queen one.

The one that says "Your question specified we were talking about "where the big money is." Had you asked a different question, I might have responded differently.

But thanks for responding by telling me what I think instead of asking. AGAIN. Is there any chance whatsoever that, before one of us dies, you could, you know, not do that anymore?"

And also note that I specifically responded to the amounts (opensecrets.org suggests that almost always health care providers are exactly where the big money is) and noted a problem with the amounts. He didn't respond to that, he just freaked.

[JanieM]

Seb, with respect, because I really do learn from these debates:

You wrote: He is a drama queen. That is pretty much all he ever does in threads.

I pointed out that Phil’s first contribution was undramatic enough to have nothing but numbers in it, attempting (lightly and probably too obliquely) to point out that drama is not all that Phil “does in threads.”

Your then pointing me to some other comment might lead some people into the temptation of suggesting that you’re engaging in a little drama, or at least exaggeration, yourself. Far be it from me, however. ;)

Granted that Phil didn’t reply to your discussion of the discrepancies between his numbers and the numbers you were finding. No more did you reply to this from him:

No, I was assisting Eric in answering the question that was asked of him, which was, "Why the focus on bit player pharma? How about doctors and hospitals? They are where the big money is."

Your question specified we were talking about "where the big money is." Had you asked a different question, I might have responded differently.

It seems to me that you did shift the goalposts. You asked about money, Phil contributed some information about money, you told him he was making a mistake in focusing on money. I can understand how he would get exasperated.

If the option is available to Phil to shrug and walk away from the keyboard instead of venting his exasperation, the same option is available to you when you're tempted to start sparring with him. I haven’t been here for what is apparently the long history between you two, but it can get a little...tedious, and it certainly doesn't contribute anything to whatever topic is at hand.

Of course I have the option of walking away from the keyboard myself (instead of either venting or giving a sermon, which I would probably resent if it were directed at me), but before I do that, let me offer a maxim I heard at a workshop once, and have been trying to put into practice ever since, with -- obviously -- mixed success:

Don’t bite hooks.

[Joseph Tomei]

In China, they take you out back and shoot you in the head like a freaking rabid dog for pulling crap like that.

While the Chinese example is a bit extreme, there is sort of an Asian approach to law which goes sort of like this.

1. make laws so that they are impossibly strict
2. Use administrative discretion in choosing when or when not to enforce them
3. When public protests get really loud, crack down openly and publicly

Rinse and repeat

I have to try and get this across to the exchange students who come here every year, because they get a rule book about the dormitory they stay in with things like a 9:30 curfew and no bicycle riding after dark, etc etc, and they freak. If they (and I) am lucky, they realize that if they don't openly flaunt authority, they can generally do as they please.

About every 4 or 5 years, one of two things happens. Either some exchange student does something so egregiously wrong that the powers that be feel compelled to start following the letter of the law, or, worse, some exchange student feels such umbrage at a set of rules that obviously have no common sense behind them that they feel compelled to openly break the rules in order to provoke a confrontation.

For better or for worse, this sort of approach to setting out rules is very problematic for Westerners, so that it is hard to really justify it. But it does work, so long as everyone knows what the parameters are.

When the cycle goes for too long and people really get nasty and greedy, the payback is often as Russell points out and we haven't started reducing the number of exchange students in this way. But the whole thing is premised on a different way of enforcing rules, I think.

[Sebastian]

Here's the thing. The comment that Phil responded to was:

This is a deeply weird response. Why the focus on bit player pharma? How about doctors and hospitals? They are where the big money is. You could reduce pharma profits to zero (literally zero, as in make it so that creating pharamceuticals never made anyone a cent of money) and you would barely touch the spending gap caused by doctor's pay differentials between the US and the rest of the world. Same with hospitals. I submit that worrying about pharma is likely to get get you less money saved, and larger actual negative medical ramifications than almost any major thing you could possibly focus on in health care reform.

Now, maybe I shouldn't have said "where the big money is" when I'm talking about capture, because it focuses too tightly on pure dollars when capture is about the big players. And Eric conceded that he meant the Health Care industry at large anyway. Which was my point. Note that Phil's attempt to *help* Eric comes AFTER Eric stated that he really meant Health Care organizations in general and AFTER I had already apologized for failing to notice that and continuing the conversation on that further on the pharma-only side. At that point we had pretty much all agreed that Eric really meant much more than pharma. Which made much more sense.

So Phil's numbers were posted without citation or comment. I looked them up the first place I could think of, and found that there were some significant discrepencies and that in fact on the comparison numbers at opensecrets it appeared that *as I had stated* Health care providers and hospitals spent MUCH more money than pharma companies. But then I decided to look further to find his numbers, and I found them too. And then I noticed that the numbers didn't match the summary numbers, and were in fact off by quite a bit year to year. I couldn't figure out why, but I noted and linked the issue for further discussion.

I don't know what you would normally want out of good faith argumentation, but I would think that digging up the links myself, without any help from Phil, pointing out that the numbers initially seem to vindicate me and than problematizing it by showing that in some cases they helped his argument and providing the links for anyone who might be interested, is pretty good.

So far Phil's response to that has been absolutely nothing of substance and has instead been a freak out.

And he has returned to the thread twice since then, so it isn't like he couldn't have. And that is pretty much how it always goes with him in responding to me.

And yes, I know I should let it go. But that isn't my normal nature, and I do try to fight it, but I don't always win.

And yes, I know I just did it again.

[sigh]

[russell]

But the whole thing is premised on a different way of enforcing rules, I think.

In China they identify a responsible individual and they make them pay.

Here we don't go looking for responsible individuals because we're all about corporate "persons".

So if we're going to have corporate "persons" I say shoot the corporate person in the head.

Pull their charter, liquidate any and all assets and return the proceeds to the folks harmed. Investors are cleaned out, which should give them a much more concrete understanding of the word "risk". Principals never get to act in a position of financial responsibility again.

It's us against them.

[Phil]

Five ThingsTM I have learned this morning:

1. Being called "a drama queen" by someone who has now written 500+ words in response to four sentences -- a gay man, no less -- is at least twice as hilarious as you would think it is if someone described it to you.

2. Sebastian is permitted to respond to people before reading the whole thread, but nobody else is, or at least I am not.

3. Let's play the Miller Analogies Test! 101 words : "freak out" :: 500+ words : _______.

4. Repeatedly responding to people with things like, "You are making the mistake of blah flippity blah" rather than asking them questions (and no, aggressive prodding does not count as "questions"), especially when you yourself laid the groundwork for the response and now admit you screwed up*, is the tactic of a tendentious, puffed-up pedant who maybe wants to take a step back and look at himself.

5. Asking someone, politely, to not use the tactic described in 4, above, is apparently a "freak out."

*"Now, maybe I shouldn't have said "where the big money is" when I'm talking about capture, because it focuses too tightly on pure dollars . . . Yes, the phrase "big money" does, in fact, imply one is talking about money.

Now, on to the substantive topic, regarding the numbers I posted, what kind of response would you like, Sebastian? At the point that I responded, before you and Eric and moved on from pharma to health care generally, I posted the numbers that were easiest to find. You, apparently having less to do at work than I do, dug around for other numbers so you could prove you were right.

Great! The discussion that led to my initial response had already moved on by then, and I have neither the time nor the inclination to a) do a meta-analysis of how opensecrets.org compiles their information and why numbers that should agree across categories instead don't add up, or b) continue to hang up the thread on a side topic that's no longer of interest or relevance.

You apparently have no such reservations. Bully for you. That and $2 will get a grande coffee at Starbucks. Pick one up for yourself and send me the check.

[russell]

1. Being called "a drama queen" by someone who has now written 500+ words in response to four sentences -- a gay man, no less -- is at least twice as hilarious as you would think it is if someone described it to you.

Not for nothing, but I'd say this was textbook bad form. I'll leave it to you to puzzle out the reason why.

[hairshirthedonist]

I haven’t been here for what is apparently the long history between you two, but it can get a little...tedious,

I take it as a sort of blogging version of an episode of "The Odd Couple." Some other-than-Thullen and unintended comic relief within a serious discussion. Mileage varies, always.

[Julian]

Yeah, I wasn't sure if that sentence by Phil was meant to be an insult to gay men or a defense of them. Was he saying that he was being called a drama queen by a gay man (which would be "ironic" since being a drama queen, or just a queen, is a gay stereotype)? Or that he, a gay man, was being called a drama queen, and that he took it as a slur? Either way, can we talk about financial regulation now?

I am not aware of a cogent anti- financial regulation argument. Not all government regulation is bad. Not all of it is good. Arguing that financial regulation is bad because the government mucks things up is specious. The government does many things; it doesn't necessarily do them well, but it does them better than any other institution we have found. Republicans seem to think the government is perfectly capable of executing people and conducting multiple simultaneous foreign occupations.

Furthermore, where's the proof that regulation and increased oversight will stifle economic growth? As far as I know, we're not proposing banning the stock market. We want to prevent the specific bad conduct that precipitated the financial crisis. Does anyone seriously refute that? I don't even mean anyone here. I mean anyone in the marketplace of ideas?

[russell]

The government does many things; it doesn't necessarily do them well, but it does them better than any other institution we have found.

Thank you.

[Jesurgislac]

Phil: Five ThingsTM I have learned this morning:

And one of them should have been: don't be gratuitously offensive.

Four of your five points I agree with: the first could have been fine if you'd omitted four words.

[Nate]

Sebastian: Assuming you're serious about regulatory capture being immediate and horrible, how would you suggest dealing with a gigantic con like just happened, or having reform to prevent it from happening again? Since you dismiss out of hand the idea of government being able to regulate things to try and prevent financial institutions from betting more money than exists in the world on housing prices and other bubbles?

Break the companies up smaller? How, without government doing it? Enforce a currency based on some constant, rather than a floating currency (which constant? Gold? Uranium? sand? Solar flux into the earth?) Trusting the "magic of the market" to get shareholders to fire CEOs who do this sort of thing? That hasn't worked, obviously.

Do you have a suggestion, or are you just bashing the mere idea of government regulation?

[bobbyp]

"Sebastian: Assuming you're serious about regulatory capture being immediate and horrible...."

Good god, man! Are you saying the EEOC has been taken over by, (gasp)NEGROES!

[Sebastian]

I would tend to think that leverage restrictions and clearinghouses with defined counterparty responsibility would be a good thing.

Bobbyp, was it totally necessary to be horribly racist?

[russell]

I would tend to think that leverage restrictions and clearinghouses with defined counterparty responsibility would be a good thing.

This sounds great to me, and for reasonable definitions of "restrictions" and "responsibility", this would probably be more than enough to get what needs doing done.

And not to be a jerk, but "restrictions" and "defined responsibility" are forms of "regulation". Which is, I think, your point, I just wanted to emphasize the need for input from the public sector.

I'm aware that quite often I come off like a ranting maniac when I comment about corporate malfeasance, but to be perfectly honest I sincerely believe we are either approaching, or have achieved, the point where it's us against them. For "them" here, please read C level corporate management and the financial sector in general.

The prevailing ethic, reinforced in law and corporate policy, is that people who act on behalf of corporations have basically one responsibility: to maximize the return on investment for the owners.

What I want to point out, emphasize, and underline in bold colors is that that is a profoundly antisocial stance, both in principle and in practice.

Some corporate officers are jerks, and some are splendid people. Just like the rest of us. But *in their capacity as corporate officers*, every incentive they operate under motivates them to consider return on investment to the owners as the paramount good.

That being so, IMVHO it behooves the rest of us to make sure they are on the tightest, most secure leash we can devise. Because, unless your entire life revolves around your ownership of a piece of their company, their interests and your interests are going to diverge, sometimes significantly, and they are bringing a lot more resources to the table than you are.

What I would really, really like to see is a corporate ethics, and a legal infrastructure, that allowed for *all* stakeholders in any corporate enterprise to have their interests considered.

It's not impossible.

Until that day arrives, I want those folks on a tight leash, because every incentive they operate under makes it us vs. them.

And if it's gonna be us vs them I'm not losing without a fight.

In the case of the ratings agencies in the particular context we're talking about here, as best as I can make out they abetted a fraud of world-historical proportions, and have forfeited any claim to a benefit of the doubt, or any illusion of good faith. They deserve the current-day legal equivalent of tar and feathers.

[bobbyp]

"Bobbyp, was it totally necessary to be horribly racist?"

Proving once again that conservatives totally lack the irony gene? That they tend to project? Pots meeting kettles? Hard to say.

But let's get to the heart of the matter: Your central, and as far as I can determine, essential claim that 'enormous sums of money ....greatly influence and distort our political process'(EM) and that this is "true for ALL large government regulation"(you, emphasis mine). But when it is pointed out by way of counterexample that your assertion is a too overly broad truism that is, for the most part, manifestly self evident (unless you are a Republican), and a counterexample is brought up, you argue elliptically against regulation and call people names ("drama queen", "racist").

That sir, was a low blow. And your apology will be posted exactly when?

It's like debating a proposition in physics that is held in abeyance because even though both sides accept the concept of gravity, one side insists that it be debated first.

[AndYnot?]

(I've been reading here and rarely commenting for years now. I'm now signed in under the name I used to use. Before, the site would let me comment as "RobW" but now it won't. I'm signed in now under older name, maybe it'll work now.)

Phil, you've got Jesurgislac and someone I've never heard of (but who has trouble with the idea that the US automakers worked successfully against the Japanese for decades by citing now instead of wondering about the 1970s?) on your side. I'm completely underwhelmed.

Ok, the fact that you've never heard of me is intended here to be dismissive right? Implied is since you don't know me, my opinion is worthless, or rather, underwhelming. See, this is an ad hominem, an insult. Or it would be if it were more directly stated, but since you've merely implied it, it's a deniable ad hominem. Gratuitous insults, implied or direct, are against this blog's rules, yes?

Umm. That wasn't passive aggressive.

Deniable insults are, in fact, a form of passive aggression. You've invited the unseen audience to agree that someone is something bad, without directly saying so.

But if you want painfully clear: He is a drama queen.

Clarity wasn't the problem, Seb. Your intended meaning was obvious. The problem was the name-calling and the attempt at deniability in your name-calling. So, now you've said it outright. Better. Still a violation of the rule against name-calling, but at least it's direct.

(FWIW, I was not, as Seb suggests, actually supporting Phil. I was objecting to Seb's tone.)

-RobW

[AndYnot?]

(Broken up into two parts in case length was the problem...)

Julian: Arguing that financial regulation is bad because the government mucks things up is specious.

Exactly.

Nate:

I think Seb is not serious about presenting the risks of regulatory capture. He's hardly yet come up with an example of it so I'm starting to wonder if he knows what it is. I think he is, as you suggest, simply bashing government regulation as a general concept. In my opinion, which you may find worthless since you've probably not heard of me either, he is using, or misusing, the phrase "regulatory capture" as a boogeyman and a distraction.

I also think he's too smart to not be doing so on purpose. (See, now that's how you do passive-aggression!)

Come on, Sebastian. Longtime lurkers like me, even those you've never heard of, would really love to hear an actual argument against finance sector regulation. Or do you want to just keep dancing around the subject a little longer?

I would tend to think that leverage restrictions and clearinghouses with defined counterparty responsibility would be a good thing.

Or you could simply abandon your position against regulation, though I doubt you'd acknowlege that you just did so. That works too.

Did you really think BobbyP's comment was racist, and not sarcastic? You didn't pick up the "Blazing Saddles" vibe from it?

-RobW

[AndYnot?]

Ooh, almost forgot. This was really my favorite part:

(but who has trouble with the idea that the US automakers worked successfully against the Japanese for decades by citing now instead of wondering about the 1970s?)

Auto industry history happens to be a favorite topic of mine. Have at it.

Dude, the adaption of the standards that I mentioned previously took place in the '70s. That's precisely the period I was referring to.

Just how successful do you think US automakers were in keeping out the Japanese, even in the 1970s? I remember the -70s; I remember my neighborhood being full of Toyotas, Hondas, Datsuns (what Nissan was called then), Mazdas, and Subarus.

The fact is, the Japanese didn't even begin to compete in the US market until the mid-70s. They simply didn't have any products that could sell here; their biggest cars were subcompact by our standards and pitifully underpowered for the speeds and distances we drive. It was not until several events of the mid'70s (the gas crunch, the new pollution and fuel economy standards, highly-publicized issues of US car quality and safety), and a new commitment to designing cars specifically for the US market, made them rather suddenly competetive.

When they did finally get serious here, the US companies barely reacted at all. They pretty much just abandoned the market for smaller fuel-efficient cars (and inexpensive sports cars) altogether, completely failing to predict consumer demand for such. This proved a boon to the Japanese companies when the industry saw a sudden rise in fuel costs and new regulations on economy and emmissions.

(In my, and many observers', opinion, the US companies have repeated this error all over again with the last 20 years' emphasis on SUVs, trucks, and big sedans in their lineup. They just don't learn.)

The US car industry fought those regulations tooth and nail; the Japanese simply met them, and with their smaller cars and engines were already ahead from an engineering perspective.

Now, it is true that the US companies lobbied for protectionist measures against the Japanese imports. This was argued at the time, and quite credibly so, to be a reasonable response to Japanese protectionism. In other words, just another run-of-the-mill trade dispute.

And STILL not an example of regulatory capture.

[Sebastian]

"But when it is pointed out by way of counterexample that your assertion is a too overly broad truism that is, for the most part, manifestly self evident (unless you are a Republican), and a counterexample is brought up, you argue elliptically against regulation and call people names ("drama queen", "racist")."

Which counterexample do you mean? You seem to be implying something that isn't here.

"I think Seb is not serious about presenting the risks of regulatory capture. He's hardly yet come up with an example of it so I'm starting to wonder if he knows what it is."

I've come up with three examples of it. FCC (you've read publius here on this blog right?), SEC, and NLRB. Also I alluded to the decades of completely unnecessary anti-Japanese tariffs in the 1970s.

Also, Eric suggested that medical providers did it too.

So that is four.

"Or you could simply abandon your position against regulation, though I doubt you'd acknowlege that you just did so. That works too."

I have a position against regulation? Really? I thought I had a position that we had to be careful about how we regulate because capture is ALWAYS an important thing to attend to when regulating. That isn't a "position against regulation". It is a position about being careful how you regulate. One that tends toward clarity and not over delegating to commissions or agencies (like HSS perhaps...)

"Ok, the fact that you've never heard of me is intended here to be dismissive right? Implied is since you don't know me, my opinion is worthless, or rather, underwhelming."

No, the implication is that you aren't one of the commentors who has a reputation that would convince me. If russel or cleek or Anarch or someone thought so, and thought that Phil was being perfectly reasonable, I'd reconsider. You have no useful priors.

"Longtime lurkers like me, even those you've never heard of, would really love to hear an actual argument against finance sector regulation."

Great. It would be better if you even contributed. I've given my thoughts, and russell for one seems to agree with me. Do you disagree with me?

[Ugh]

So, I'm not inclined to believe that these Goldman people broke any laws. The term "client", it seems to me, is in these contexts a bit of a misnomer. The more appropriate term would be "buyer", and as we all know, buyer beware.

That is, GS CEO Blankfein is going to make a big show at the PSI hearing tomorrow about how GS couldnt survive without its "clients." But who are GS's clients? Certainly if they are arranging an IPO for a firm that firm would be a client. But the investors in such an IPO? Seems hard to say. Which is why there are the securities disclosure laws, which I guess the SEC is accusing GS of violating, though not criminally.

Put another way, the seller, it seems to me, will almost always know more about the property being sold than the buyer. Hence, the law requires disclosure about the property, but (I think) rarely if ever requires a disclosure of why the seller is selling. Suppose I've lived in my home for 6 years and notice it has a bad habit of leaky pipes. I decide I can't stand it anymore and put the home on the market, listing it at a price above what it would sell for if this problem were known, and there is no disclosure required under the law for this problem. Further, a diligent home inspector would probably (but not certainly) discover the problem. Should I feel bad if someone buys at my asking price? Are they my client? Or is the house worth more to them than it is to me such that the exchange is mutually beneficial (at the time)? And why not make the buyer disclose their reasons for buying to the seller? What if the buyers an agent for wal mart and my house is the last piece of land they need to open a multi-million dollar superstore?

In any event, back to GS. It seems to me that the worst it is accused of is forming an institutional view of the housing market as way overvalued but continuing to sell mortgage bonds to clients/customers/buyers who were purchasing with a view that these bonds would produce a positive return. The open questions are (a) did Goldman have some sort of fiduciary duty to disclose its view to these buyers (seems unlikely) and (b) was there some other duty for it to disclose that, e.g., it was also dealing with someone taking the opposite side of the bet. As to (a) unless it is acting as investment advisor, I think not. As to (b),the Ibanks always deal with both sides, so buyer beware. However. A combination of (a) and (b) is.... Interesting

I'll shut up now

[bobbyp]

Sebastian: "Which counterexample do you mean?"

Deliberate obtuseness is not a defense.

[Ugh]

So, I'm not inclined to believe that these Goldman people broke any laws. The term "client", it seems to me, is in these contexts a bit of a misnomer. The more appropriate term would be "buyer", and as we all know, buyer beware.

That is, GS CEO Blankfein is going to make a big show at the PSI hearing tomorrow about how GS couldnt survive without its "clients." But who are GS's clients? Certainly if they are arranging an IPO for a firm that firm would be a client. But the investors in such an IPO? Seems hard to say. Which is why there are the securities disclosure laws, which I guess the SEC is accusing GS of violating, though not criminally.

Put another way, the seller, it seems to me, will almost always know more about the property being sold than the buyer. Hence, the law requires disclosure about the property, but (I think) rarely if ever requires a disclosure of why the seller is selling. Suppose I've lived in my home for 6 years and notice it has a bad habit of leaky pipes. I decide I can't stand it anymore and put the home on the market, listing it at a price above what it would sell for if this problem were known, and there is no disclosure required under the law for this problem. Further, a diligent home inspector would probably (but not certainly) discover the problem. Should I feel bad if someone buys at my asking price? Are they my client? Or is the house worth more to them than it is to me such that the exchange is mutually beneficial (at the time)? And why not make the buyer disclose their reasons for buying to the seller? What if the buyers an agent for wal mart and my house is the last piece of land they need to open a multi-million dollar superstore?

In any event, back to GS. It seems to me that the worst it is accused of is forming an institutional view of the housing market as way overvalued but continuing to sell mortgage bonds to clients/customers/buyers who were purchasing with a view that these bonds would produce a positive return. The open questions are (a) did Goldman have some sort of fiduciary duty to disclose its view to these buyers (seems unlikely) and (b) was there some other duty for it to disclose that, e.g., it was also dealing with someone taking the opposite side of the bet. As to (a) unless it is acting as investment advisor, I think not. As to (b),the Ibanks always deal with both sides, so buyer beware. However. A combination of (a) and (b) is.... Interesting

I'll shut up now

[bobbyp]

"Put another way, the seller, it seems to me, will almost always know more about the property being sold than the buyer."

Which would, all things being equal, imply a lower clearing price. Alas, all things being equal is somehow missing here (information asymmetry which see).

Sellers, as opposed to buyers, have many reasons to sell. Damn those indifference curves!

"Should I feel bad if someone buys at my asking price?" From a moral perspective, yes. Is there another valid perspective here? Opinions vary.

"did Goldman have some sort of fiduciary duty to disclose its view to these buyers?"

Ok...no. However, they are essentially trading on inside information...which is illegal, but that applies to exchange traded vehicles, so you got me there.

I do not recall "buyer beware" as a topic in my microeconomics classes. Now why is that?

[bobbyp]

"Until that day arrives, I want those folks on a tight leash, because every incentive they operate under makes it us vs. them."

-russell, 8:48pm

Glad to see you agree with this sentiment, Sebastian. If we step up from 'regulation' to leashes, I have no problem.

[bobbyp]

seb sez: "Great. It would be better if you even contributed."

Wow. Was that slipped in between the 3rd and 4th ribs or the 2nd and 3rd? So I guess now an idea can, a priori, be dismissed pending determination of the bona fiddies of the author?

Thus doth civilization advance. Watch it! Stay away!! One step closer and I'll hit ALT+CONTRoL+DELETE! I mean it. Really!

[John Thullen]

Well, every transaction is a compromise between two liars -- the bid and the ask..

The seller liar has a little monopoly on the info and doesn't like transparency.

Ugh, there's a great little episode of "The Andy Griffith Show" in which Barney Sachs gets his realtor license and starts speeding up the money velocity in town.

It takes about 18 and 1/2 minutes for everyone to realize it's all full of crap and commerce pretty much comes to a full stop, except for haircuts and maybe Aunt Bea trading a chicken for fake liver pills.

Kinda the way the Tea Partiers and Goldman Sachs think wistfully of how it used to be in Thomas Jefferson's America, before the Louisiana Purchase.

Funny how the liar buyers and the liar sellers always seem to vote Republican, unless the Democratic Party ups the bids.

[bobbyp]

"Also I alluded to the decades of completely unnecessary anti-Japanese tariffs in the 1970s."

The 1970 encompassed "decades"? Who knew? Also this statement completely ignores the post immediately above it which (IMHO) completely eviscerated the assertion.

So that makes 3.

The NLRB? Explained? Not.

So that makes 2.

The military Industrial complex? Hardly a confluence of "regulation"...interest, yes.

The FCC and the SEC? Yes. Two out of four, maybe 5, but who is counting? HCR--well maybe six, but the capture is in the future, not as the folks a firedoglake assert... like right now? Is that ALL "government regulation"? Why no, it is not.

Does Sebastian's facile dodge preclude regulation in principle? Why no, it does not....he even admits it (agrees with russell). Does he support regulation? Sometimes yes, sometimes no.

If you are not perplexed, send me the two bucks, and I'll find a Starbucks on my own.

[Julian]

"That isn't a "position against regulation". It is a position about being careful how you regulate. One that tends toward clarity and not over delegating to commissions or agencies (like HSS perhaps...)

Please cite the person(s) who said, wrote, implied, or expressed the idea that the U.S. government should not be careful about how we regulate. Here's what some of what Eric said, I think it is representative:

"unless the Democrats (and maybe even one or two Republicans - wouldn't that be nice?) get serious about establishing parameters that better ensure greater transparency and fair play.

A well-conceived, rules-based framework would"

So, before you even said that you'd like "clarity," Eric had specified "transparency." He says "rules" rather than committees or agencies (maybe these bodies are needed to judge adherence to the rules, but I don't read minds). Right now, you are coming off as a concern troll. E.g.
"Oh no, believe me, I'm all for going out to eat; I just think we should be very careful about where we're spending our money and consider the fact that the restaurants around here are terrible. But please, by all means, let's go once we've addressed these nagging concerns of mine."

Given that the credit-rating agencies were accepting bribes to defraud investors about the quality of business deals, one could argue that Regulatory Capture isn't a risk, it's a reality. So let's change the laws to minimize that. Can you cite specific provisions in the proposed regulatory legislation that are going to have the opposite effect?

[Bernard Yomtov]

Ugh,

Suppose I've lived in my home for 6 years and notice it has a bad habit of leaky pipes. I decide I can't stand it anymore and put the home on the market, listing it at a price above what it would sell for if this problem were known, and there is no disclosure required under the law for this problem.

(My bolding)

But the case against Goldman is precisely that they failed to make disclosures required by law.

[bobbyp]

"Well, every transaction is a compromise between two liars -- the bid and the ask.."

Yeah, yeah, sure. But what's the spread?

[Sebastian]

"He says "rules" rather than committees or agencies (maybe these bodies are needed to judge adherence to the rules, but I don't read minds). "

The main proposals are to give the SEC much more rule-making authority. The SEC is an agency.

[russell]

So, I'm not inclined to believe that these Goldman people broke any laws.

Ugh, what's your point of view on the ratings agencies?

And, is a violation of law required before government (whether Congress or a regulatory agency) can act?

The main proposals are to give the SEC much more rule-making authority. The SEC is an agency.

A fair point.

I think that, due to my own ignorance, the significance of regulation-by-agency vs regulation-not-by-agency is escaping me as regards capture. Could you please expand that a bit? If not an agency, then what? Simply legislation? And if simply legislation, who is tasked with enforcement?

[Slartibartfast]

Deliberate obtuseness is not a defense.

Let's try and stay within the posting rules, please.

But in the spirit of your comment (but more posting-rules compliant: ad hominem is not a rebuttal.

[Nate]

Sebastian: Do you think rules made by the SEC are going to be more likely to be captured and abused by the regulatees, or rules made by Congress? Or are you figuring the SEC rules would be easier to change and write loopholes in than Congressional rules, either now or in the future, after further regulatory capture?

And if you consider the SEC and Congress both to be incapable of managing this, then what, who will be, since we lack incorruptible philosopher kings? We know people are going to weasel around rules, we know they're going to try and bribe the regulators, that's why we need to do more to insulate the regulators from the regulatees, and make the rules and incentives set up to encourage transparency and careful watching, rather than trusting that markets can never be wrong.

[Julian]

Police corruption (i.e. complicity with drug trade, brutality is a different aspect of the problem) is an example of regulatory capture, but the solution was not to abolish police forces.

It's not enough to say that regulation has pitfalls. All approaches do (and if you can think of one that doesn't, as Nate points out, please specify it). You must prove that regulation or regulatory agencies are worse than a specific alternative. If more regulation is the least bad choice we should do it.

[Sebastian]

"Do you think rules made by the SEC are going to be more likely to be captured and abused by the regulatees, or rules made by Congress?"

The SEC. And this isn't theoretical. We've seen it, *with the SEC* in the history of the current crisis. And yes, historically, capture is much more likely in agencies than it is in legislative bodies.

It feels to me like people in this thread are treating ideas of 'capture' and ideas of 'corruption' as if they were the same thing. But they aren't (which is why the drug trade analogy is so bad). They aren't even particularly related except in the sense of who ends up in control of the rule making.

Agency capture doesn't work by bribing the employees of the agency (though an argument could be made that in agencies where employees often end up working for the regulated companies that there is an element of that, but the idea doesn't depend on it). Agency capture works because the regulated entities are, for long periods of time, the only ones who care deeply about what is going on in the agency, the only ones who have extended contacts with the agency, and the main ones who spend time lobbying the agency. Over time that means that the majority of the time-intensive and thoughtful input end up coming from the regulated entities and pretty much nowhere else. Theories about what works and what doesn't get filtered through the regulated entities. The regulated entities get a lot of say in how things are looked at. You are friends or friendly with the industry contacts that you see and talk with all the time in your professional life.

And worse, it isn't easy to get around because it really is a good idea to consult with the companies who are being regulated because they really do have a deeper understanding of what goes on than just about anyone else.

A legislature doesn't have many of those problems, though it certainly doesn't avoid all of them. A legislature doesn't spend all of its working life deeply involved with the regulated company.

Now I don't think you can totally avoid agencies, because there is a certain threshold of expertise that is required in lots of topics that you can't expect a Congressman (who has developed interpersonal skills, but who isn't necessarily math smart for example) to gain. But there is a good argument for either VERY strict Congressional oversight (which never happens in the real world with delegated agencies) or for keeping a fairly large amount of the important rule-making in Congress with consultation by the agencies. And at least Congress can be held accountable, most agency workers really can't.

[hairshirthedonist]

While legislation had been applied as prophylactic, the repeal of Glass-Steagall once again exposed vulnerabilities.

I think there have been a lot of good points made here, and I wish some (mostly Seb on one side and RobW/AndYnot? and bobbyp on the other) would lighten up on one another.

Anyway, Seb, what do you think of reinstituting Glass-Steagall? Do you think that would increase or decrease the likelihood of 1) regulatory capture and 2) a future economic crisis caused by excessive risk-taking by big banks?

[Julian]

"A legislature doesn't have many of those problems, though it certainly doesn't avoid all of them. A legislature doesn't spend all of its working life deeply involved with the regulated company."

Our legislatures is composed of politicians who require money to run reelection campaigns. The banking industry contributes to their reelection campaigns. The banking industry spends money lobbying these politicians. I think that constitutes deep involvement; by what measure is the legislature less compromised than the agencies?

Glass-Steagal was repealed by our legislature (and President Clinton) because the banking industry wanted it repealed and paid/lobbied politicians to write and pass the bill which repealed and replaced it. Your explanation of regulatory capture makes sense, Sebastian, but I don't see why turning regulation over to Congress would be better (partly for the reasons of expertise, which you cite).

Why can't agency workers be held accountable?

[JanieM]

Now I don't think you can totally avoid agencies, because there is a certain threshold of expertise that is required in lots of topics that you can't expect a Congressman (who has developed interpersonal skills, but who isn't necessarily math smart for example) to gain.

And following on Julian's point, it is precisely because legislators don't have the level of expertise that agency bureaucrats have that they are potentially all the more susceptible to believe what lobbyists tell them. Because the lobbyists not only represent entities that give legislators huge campaign contributions, lobbyists also outnumber and outgun (so to speak), in the hallways and offices of legislatures, anyone who might speak for us.

[Ugh]

All,

Sorry I haven't had a chance to respond today, will see if I have more time later in more dtail. If the conversation is:

Client: Hi GS, we'd like to buy some MBS's.
GS: Okay, here's some, and here's the required disclosures.
GS (thinks to self): gosh these things are a such a bunch of sh1t that we're betting against, but if you want to buy them...
Client: We'll take em!
GS: Sold!

Then I don't see the problem. To the extent GS didn't disclose something it was required to disclose, obviously a problem.

hopefully more later

[bobbyp]

Sebastian: "...because it really is a good idea to consult with the companies who are being regulated because they really do have a deeper understanding of what goes on than just about anyone else."

As in tobacco companies knowing more about the health dangers of tobacco than independent scientists and providing "thoughtful input" to the FDA? As in polluters knowing the science better than ecologists or EPA staff? But I will grant that John D. Rockefeller probably knew more ways to cheat than the early anti-trust lawyers.

Further--NOBODY is claiming that the regulated companies "shouldn't be consulted". In fact, most assume they are able to obtain copious amounts of "face time" with agencies and legislators as it is.

Look, we have something akin (more or less)to a democracy. Our elected leaders should set the policy goals and pass legislation setting the ground rules/parameters for social policy. If they want to go into the weeds about rules, they can, but they don't have to. If they stop paying attention, they should be punished. If they get bought off, they should be punished.

Regulatory capture is not about a bunch of companies in a particular industry having undue influence on the rules because "nobody cares" or "nobody else knows anything about the minutae". It's about the confluence of naked monetary interest with respect to the rules, and the ability to bend the agency rulings to favor the regulated at the expense of the public.

And I brought up the EEOC for a reason. It's been around a while. It writes rules. It is a part of the government. According to your sweeping hypothesis ("This is true for all large government regulation"), the Commission is ripe for "capture". So who are the insiders in this case? Employers? The black community? And if it is a sleepy little backwater, why all the sturm and drang? Bakke? Legislative roll-backs? After all, who knows more about discrimination than those who are discriminated against? The charge that anti-discrimination agencies casually bent over backward for blacks has a long history, and there has been a lot of white push-back. Therefore it is possible to conclude that "capture" is not necessarily a one-way street, and there are circumstances where "capture" is actually reversed (NLRB anyone?).

So why doesn't it happen at the SEC? Could be the money, but I guess that makes me a wild eyed radical.

Conclusion: Nothing that Sebastian has asserted provides a prima facie(?) case against regulation qua regulation.

[bobbyp]

Client: Hi GS, we'd like to buy some MBS's.
GS: Okay, here's some, and here's the required disclosures. It's really great stuff, triple A rated by Moody's. Better yet, if you have any concerns, I'll even sell you some insurance in case some of it starts to stink the place up.
GS (thinks to self): gosh these things are a such a bunch of sh1t that we're betting against, but if you want to buy them...now we've got to call AIG and bet a bundle that these clinkers will crash. And we can short the insurance we sold to boot!
Client: We'll take em!
GS: Sold! Don't forget the insurance.

[CharlesWT]

The Deep Capture website was created to bypass the “captured” institutions that mediate our nation’s discourse. It was initially funded by Patrick Byrne, CEO of Overstock.com, but it is not part of Overstock. It functions as a separate, limited liability media company, whose co-owners and managers are Judd Bagley, Evren Karpak, and Mark Mitchell.

Public choice theory describes a phenomenon whereby industries take control of, or “capture”, regulators who are supposed to oversee them. The claim of this website is that powerful actors have been able to influence or take control of not just the regulators, but also law enforcement, elected officials, national media, and the intellectual establishment.

It is our mission to expose this “deep capture.”
[...]
DeepCapture

[Sebastian]

"If they stop paying attention, they should be punished. If they get bought off, they should be punished."

Do you mean people in agencies? Because that almost never happens.

[John Thullen]

"If they stop paying attention, they should be punished."

Can you fit the entire staff of the SEC and the entire Bush Administration into Bernie Madoff's cell?

Maybe it would be easier and cheaper to name Madoff the head of the SEC.

Tea Partiers could listen to Dick Armey slur his words on the Mall in the morning and be escorted to the lobby of the SEC for fleecing ... and then appear on FOX in the evening and call it freedom.

Maybe brown people in Arizona can "capture" the Arizona State Patrol, infiltrate it, give themselves jobs, and stop George Will and John McCain, to name just a few pasty-faced anti-American Republican scum, for speeding, pistol-whip them, and transport them back to Argentina, where they can molder away their lives in the jungle listening to Brahams.

These people in agencies .... are they going to be punished one day for not enforcing regulation, and then punished the next day, (jack-booted thugs they'll be called, just before Goldman Sachs and Timothy McVeigh blow up the SEC building) for carrying out the law?

[hairshirthedonist]

Anyway, Seb, what do you think of reinstituting Glass-Steagall? Do you think that would increase or decrease the likelihood of 1) regulatory capture and 2) a future economic crisis caused by excessive risk-taking by big banks?

(See, I'm trying to be specific here. Get it?)

[russell]

I really do understand the point Seb is trying to make here, and also understand that regulatory schemes are inevitably imperfect.

There is no free lunch, and there are no sparkly ponies.

However, it seems to even my financially ignorant mind that regulating this:

credit-ratings agencies knowingly gave inflated ratings to complex deals backed by shaky U.S. mortgages in exchange for lucrative fees.

should be a layup.

Were the securities worth what they said they were?

No.

Did they knowingly misrepresent their value?

Yes.

Do we have documentation demonstrating this?

Apparently we do.

These people abetted a fraud that cost lots and lots of other people their jobs, their homes, and their life savings. They undermined the viability of the financial system in this country and around the world.

What do you have to do in this town to merit a righteous ass-kicking?

This isn't about capitalism, or the free market, or tricky questions of governance and regulation. Those are all interesting questions, but the situation we're talking about is far simpler and more concrete than that.

This is about preventing gangsters from stealing other people's money through fraud.

Enough is enough. It's time to crack some heads. Find the most egregious bad actors and throw the freaking book at them, enough so that the next 10,000 smart @sses who think they might like to try it on will have visions of iron bars dancing in their heads.

It's time to kick some @ss. Way past time, actually.

[Ugh]

Ok, finally have some time.

BY: But the case against Goldman is precisely that they failed to make disclosures required by law.

Yes, I guess I was more reacting to the argument that GS was doing something wrong by selling securities to people that it had a negative view of and/or were shorting.

russell: Ugh, what's your point of view on the ratings agencies?

I haven't really delved in detail into what was going on with them, but it seems to me that they were holding themselves out as neutral arbiters of credit ratings, when in fact they were no such thing and were fraught with conflicts of interest. That sounds like fraud, or at least false advertising, so not good. Though it also sounds like there is no easy fix from what I've read, other than perhaps nationalizing them or some other quasi-public solution.

Also sounds like a similar thing with "analysts" at investment banks during the internet craziness of the late 1990s who were supposedly indepedent but, in fact, were pressured to issue positive reports on things like drkoop.com.

russell: And, is a violation of law required before government (whether Congress or a regulatory agency) can act?

Well no, Congress and regulatory agencies and gov't in general act all the time in the absence of, well, anything. Do they need a legal violation, civil or criminal, before they can, e.g., tighten regulation or otherwise act to prevent the private sector from doing something? No.

Just to take my field as an example, there transactions people enter into to save taxes that the gov't doesn't like and views as in violation of the Code/regulations/various judicial doctrines. Sometimes it wins in court, sometimes it loses. But even when it loses, it often takes action to change the statute or regulations so that taxpayers can no longer obtain the tax benefits of the transactions.