Understanding Regulation

Every day there are stories about how regulation prevents a good guy from fulfilling his passion. In this story, it's about someone who wanted to start a small farm in an area of King County, Washington which used to be filled with small farms (ah, I remember many a summer picking strawberries out in Carnation) but which is now filled with Microsoft mega-estates. Yep, there is open space, that is, unbuilt lawns for the large, gated estates.

What we don't really understand in our society is often regulation is meant to protect special interests. For instance, during the Northern spotted owl debates in the Pacific Northwest, large multi-national timber companies encouraged enforcement of the Endangered Species Act because they knew it would eliminate competition from smaller, more nimble logging companies. And indeed, the big companies survived, the small ones went bankrupt. But the cleverness of this "campaign" was the small logging companies thought it was the forest activists that wanted them out of business, not their so-called colleagues in the big timber companies!

And this story about the farm is another example. Surely the hip Microsoft millionaires shop in chic markets exclaiming local foods. But they just don't want the smell of manure next door to their "LEED Certified" houses behind gates. So they regulate farms away from their fancy homes....

What Do We Want? Change

I am beginning to sound like a one-note trumpet player. Perhaps more like watching a violinist while Rome burns. But the reforms of the United States financial industry ain't gonna' happen. You know it isn't when a pundit in Forbes even admits it isn't going to happen.

To Arianna Huffington's credit, she has been writing about the failure to pursue reform last winter when the "policy window" was wide open (even President Obama's chief of staff Rahm Emmanuel admitted that a crisis provides opportunities for policy changes). Now, with Wall Street's lobbyists out moneying and out gunning everyone, the likelihood for change is, well, zip.

This time around it's up to us to watch our own backs.

A New Hero

As promised a few weeks ago, US District Court Judge Jed Rakoff rejected the settlement between Bank of America's Merrill Lynch and the Securities Exchange Commission. The initial complaint by the SEC was over the mega-bonuses that Merrill awarded it's employees prior to the end of the year. Remember? Merrill is the one who ran into the arms of Bank of America because it was going belly-up? But the so-called geniuses of Merrill apparently still "deserved" a bonus? Go figure. Anyway, the SEC filed a complaint because of Bank of America's failure to disclose this information to it's shareholders.

Here it is, in the judge's own words, the settlement "does not comport with the most elementary notions of justice or morality."

Gotta' love it. On the same day President Obama remembered that his administration promised to reform Wall Street (oh, yeah, that idea) having lost their window of opportunity, it took a federal judge to begin the process. Hello! Wall Street! Even the SEC was willing, yet again, to go lightly on who it was regulating (in this case Bank of America) and this brave, heroic judge said it wasn't enough.

Fear Itself

I thought this piece in today's New York Times was perfect. Obama is not Franklin Roosevelt. The President's financial overhaul proposals reek of compromise and caving in to the banking industry.

The barn door was shut months ago and the cows and horses are laughing all the way to the fields.

It seems the Obama Administration is fearing the worst thing for a "change" politician. Getting re-elected.

Trying to Close the Barn Door When the Cow Has Already Left

Well, it seems to me that the proposed legislation and subsequent regulation on the financial industry is like trying to close the barn door once the cow left. And it seems that the financial industry is winning this battle.

Economic Heroes: Elizabeth Waren

An expert in bankruptcy law who is on the faculty of Harvard Law School, Elizabeth Warren is challenging the Obama Administration to do all it can to ensure our economy no longer goes through the boom and bust cycles we have seen for the past thirty years.  

Currently, Warren is the chair of a Congressional Oversight Panel monitoring how the Toxic Asset Relief Plan (oops, did I mean Troubled Asset Relief Program?) is implemented.  This position has given her a soapbox to talk about what needs to happen for long range economic stability.  The kind we saw post World War II for at least 50 years.  As witnessed by yesterday's news, our economy can not continue to ride this roller-coaster that we have been on since the savings and loan crisis in the mid-1980s.  

The second largest shopping mall developer files for bankruptcy.  Foreclosure rates are rapidly increasing.  New housing starts drop to their lowest levels, ever.  Our economy is chronically sick.

So, Warren advocates a new path.  Greater regulation and monitoring of our financial systems.  Safety nets.  Leveling out the booms and busts so all Americans can find a niche to succeed.  She is spot-on and hopefully legislators and the current federal and state administrations are listening to her.  This unassuming and brilliant woman.  Here is another article relating Warren's cautious but insightful analysis of the financial institution crisis where she essentially says what we are doing mimics what Japan tried to do in the 1990s, and that decade in Japan is called: lost.

An economic hero.  Or, as Jon Stewart said, "she gives chicken soup for the economy."

Civility and Community

A friend wrote me the morning after the women's NCAA Basketball Championships that he watched the whole game despite University of Connecticut's domination over Louisville.  He commented that he was impressed with the coach of Louisville's sportsmanship, how he hugged all the UConn players, smiling and laughing with them in their joy over trouncing his own team.  We are, I think, at a loss of that type of civility and community in this country.

I was struck by an article in the New York Times about a dry and arcane subject: municipal bonds.  Apparently over the past few decades the relatively stable and mundane area of municipal bonds has also become a high volume, big money gambling machine.  Essentially, towns and cities have been convinced by investment counselors to issue bond derivatives which bet on interest rates or the bond market itself remaining stable.  The "gift" to municipalities, is that they pay low interest rates during the first few years.  It makes building a new sewer plant far easier.

Of course, as we have seen with all these complex securities, the markets are far from stable, and when chaos happens, the victims are left picking up the tab while the so-called investment whiz-kids are laughing in their mansions.

There can be thousands of discussions about the innocence or vulnerability of the victims, or in this case how financial managers of municipalities really ought to be sophisticated enough to see through these schemes.  But in reality, our society has become less civil, less oriented toward what is good for the community and more about predator and prey.

The Lords of Wall Street viewed everyone as prey.  I am convinced they walked into their offices everyday trying to figure out how to beguile each of us out of our money, not concerned about whether they were helping us or not.  Of course, the pretense, the come-on, was that they were helping us, just like the Lords of Mortgages wanted us all to believe they were helping us lower our interest rates.  It's as if these folks kept dog-eared copies of Lord of the Flies as their guide to daily living on island Earth with all the rest of us rather than the Golden Rule.  

Perhaps as we culturally begin to develop "green ethics" we also need to cultivate a sense of civility and community.  That we are not prey or predator, but rather a community of people.  That we no longer honor masses of money and gluttony as achievement but rather "what can I do for you today?" becomes a sign of greatness.  While regulation of these industries can "force" civility, it will also only cause the "brains" to figure out ways to get around the laws.  These Lord of the Flies issues really must be addressed culturally, to get at the root of it.   

In the meantime, value someone who is trying to do good.

Paper or Plastic

Today's news is from Colorado, where the state legislature turned down a proposal to ban plastic bags.  This would have been the first state wide ban on plastic bags in the nation.

As I have written before, these kinds of either/or laws usually have unintended consequences.  In Seattle, there is a proposed fee for bags, adding what seemed, at the height of the economic boom, a minimal amount to a grocery bill, but if you don't bring your own bags and have to purchase ones from the store, could add to your overall grocery costs.  It's these kinds of bans that always make me wonder whether policy makers think only of how they live versus how many of their constituents live.  

For instance, many environmentally aware people try to limit their shopping trips.  Once at the store, they may buy for a whole week, half a month, or even a month.  Let's assume they buy once a week, requiring four bags.  And let's assume the policy maker goes to the store every  night on their way home from the office, plus, maybe once on the weekend.  They may use 6 bags.  But they also use fuel, wear and tear on their transportation vehicle, additional energy to produce those bags...you get the drift.  

I think we should really focus our efforts on education rather than the bag issue.  First, the production of bags provide jobs, most often union wage, health care provided jobs.  Why risk that?  Second, many health experts will tell us that limiting trips to the grocery usually leads to healthier purchases and hence, better eating habits.  How about instead of creating whole new bureaucracies that monitor and enforce bans or collect revenues from fees, we try some education on using cloth bags (which, of course, many are made with cotton, not exactly the most environmentally friendly material, or are made in China which think about the carbon footprint of getting those over to America) or recycling paper bags?  Public service announcements on shopping lists, limiting trips, and recycling.  Instead of charging a fee for bags how about following the examples of Whole Foods who gives a credit if you bring your own bag?

It's time for new thinking, not instinctually reaching for "no" or bans that create consequences down the road which we knew would happen.

Where's Your Lobbyist?

Recently I read a short article about transit planning in Seattle.  The commentator said that he was at a meeting where the Seattle Department of Transportation (SDOT) was unveiling yet another "street diet" where the city removes one lane of traffic from use by automobiles and devotes it to bicycles.  This "street diet" thing has been going on for several years and on several major arterials.  Trust me, it bogs up traffic enormously.  But, here is the point: when the commentator asked the SDOT representative about who speaks against the "street diets," the SDOT employee said: "I speak with a lobbyist from Cascade Bicycle Club everyday.  Where is your lobbyist?"

Holy Cow Batman!  You mean we all need lobbyists to speak to government?  Much less to be listened?  The irony of that encounter is that it happened at an open house where SDOT was supposedly listening to input on the street diet.  But we all know that so-called public meetings are really a way of "letting the public let off steam" even though the decision is already made.

Today, the Obama Administration announced that it will begin describing it's ideas for regulatory reform of the financial sector.  Of course, this means everything, I assume, from how different countries interact financially to how we monitor individual financial transactions in this country.  And, I wonder, who will be speaking to the Pooh-bahs of decision making on these financial reforms?  Certainly not the average American who was foreclosed out of their house or the retired couple struggling to stay afloat when their so-called safe investments went south this month.

Indeed, the financial sector lobbyists in Washington, DC alone ensure that politicians and their staffs are well feted and their campaigns stuffed with cash.  The average person doesn't stand a chance, much less the non-profits based in DC who purportedly advocate for the "little guy."

In all of the economic restructuring that is occurring, I believe the examination and proposals to monitor and regulate the financial industry, although late in being thrust into the policy spheres, is critical.  Each of us should pay attention.  Find allies or organizations to represent you views.  Call your Congressman or Senator.  Because how the financial sector is restructured will really be the crux of our economic security in the decades to come.  We can no longer rely on the Lords of Wall Street to do what is right but on the other hand we can not stifle our ingenuity.  Just know, however, that the banks, investment houses, mortgage lenders, credit card companies, real estate industry, are swarming Capital Hill, they're calling presidential staff members, having drinks with friends of Barack Obama, writing checks for campaigns.  

We need to pay attention or else things we care about will be "street dieted" because we couldn't talk to anyone every day.

Financial Melt Down

Lots to write about as we ease into the New Year.  Of course, there is more than enough material on the economy.  But first, this just in, the financial system upon which ours and the global economy is based, is in a melt down!

Yesterday, in the New York Times Michael Lewis wrote a fantastic piece focused on the lack of regulatory oversight on the financial markets: banks, hedge funds, the stock markets.  It is, in my opinion, a must read.

Two salient points in his article.  First, something we have all known, but the revolving door between government and the industries (we saw this a lot with high powered Senators and Congressmen becoming lobbyists for the very industries they used to legislate) government regulates is a huge problem.  Lewis focused primarily on the Securities and Exchange Commission, but this regulator becomes highly paid employee routine exists in all sectors, not just finance.  It goes without saying, but Lewis drills in the point, that regulators are loathe to enforce when they know they will be seeking lucrative jobs from the very industries they are monitoring.  In the case of the financial sector, particularly the risk markets such as stocks and securities, the enforcement of regulations has become, according to Lewis, a joke.  Unfortunately, it became a very very scary joke as we now are having to deal with all the failures.

Because of the cozy relationships between regulator and regulatee, Lewis maintains the SEC has become more about protecting "predator" corporations from the public rather than the public from predatory securities schemes.  My aside to that reflection is that it is true for much of government regulatory agencies.  If you can afford a lobbyist presence in Washington, DC, you have more access to government "protection" than the rest of us.

Second, and in my opinion the more important point made by Lewis, was the emphasis over the past two decades on corporations short term gains.  The incentives for CEOs, boards of directors, and managers, is to work toward quarterly profits rather than long term health of the company much less (and this is my gripe not Lewis's) producing anything of lasting value.  And when you're driving for immediate results, you of course tend to do things which are not in the best interests of anyone other than your own wallet.  

It seems to me that the current melt down is an opportunity to re-build the whole mechanism, not just tinker trying to instill confidence.  I'm not sure, frankly, we can instill confidence in something so broken.  I am also not sure layers and layers of regulation are the answer, but I do think we need to enforce the laws we have.  At the risk of sounding harsh, it seems to me the enforcers failed.  Do they still have jobs?  Are they still monitoring banks, companies, the stock market?  In any other situation, if there was such a large and massive failure, jobs would be lost.  So, let's get new people in those positions, someone who ensures they do their job, and Congressional oversight to make sure the boss is actually accomplishing something.  But we also need to re-think how we want corporate America to act as well as how we save, borrow, and lend money.  

In the meantime, real people are enduring real pain.  If we don't spend the time, now, working on re-building, you can bet we'll be looking at the smoldering rubble again.