Accountable Regulators

President Obama has threatened to veto attempts by Congress to make Federal regulations more accountable to the democratic process. The proposed legislation would require the elected officials approve any new regulation costing more than $100 million a year. This would not require complexity. Congress routinely approves all sorts of things, down to newly commissioned second lieutenants. All it means is that some accountable elected official has signed off on the deal. Surely the President doesn’t fear accountability.

As it is now, Regulatory agencies have taken over many of the functions of elected officials. Congress and the President can take credit for passing bills that really will not work as promised in the real world. The responsibility then passes to a regulator, who makes the detailed rules and sometimes makes up rules. These guys don't face the electorate. Even better, elected officials can complain about them, even though it is the elected officials themselves who have delegated the power w/o full accountability.

I am in favor of good regulations. Making rules and regulations is a key government function. But I oppose regulations that don't work, are made obsolete by changed circumstances or cost more than the price of the problems they are designed to solve. Making regulators more accountable would not affect good regulations. Presumably Congress and the President would not object to putting their names on something that actually worked or was needed.

Nobody is proposing micromanaging government agencies, but costs of upwards of $100 million should probably require the attention, however brief, of elected officials whose job it is to watch out for us. I know my liberal colleagues on this blog surely cannot object. They claim that regulations do not really have high costs, so Congress would rarely have the need to approve or not regulations. Only the big ones would have costs of about $100 million and they would be so self-evidently good that confirmation would be as blandly uncontroversial as commissioning those second lieutenants. At least this is the logic that follows from the liberal assumptions.

So this is the bottom line. I favor good regulation, but I don't trust unelected bureaucrats to make binding and expensive regulations without some accountability from representatives we the people can elect and hold accountable. Why would anybody oppose greater oversight and accountability on something where the coercive power of the state is applied to American citizens?

Posted by Christine & John at December 6, 2011 8:11 PM
Comment #332771

First of all, no federal agency just makes up regulations at their whim. You are fully aware of that. Under the Administrative Procedures Act, there is full opportunity for public comment and in the case of significant regulation, open hearings. Further, there is provision for judicial review of regulations. This is nothing more than a effort to bring the entire rule making process and legislative implementation to a halt. If you want direct Congressional approval of significant regulations then why not simply mandate that Congress write the specific regulations into the Act in the first place. Grid lock seems to have become a Republican virtue.

Posted by: Rich at December 6, 2011 11:02 PM
Comment #332776

Hah, good luck. Power is the issue, just a fight over who controls your lives… Payback by other’s taxes is one of the rewards.

How many do you think the people who need them even know about them? I recall one program put into place a year ago in response to the home mortgage ‘crisis’. The program was set up to allow homeowners to renegotiate their mortgage. After months of being available, it turned out ONE family had qualified and taken advantage of the program. More people were going to private companies and renegotiating directly instead. How much did that program cost us just to exist, staff and finally service a single family?

Who is doing the means testing? Who is doing the cost/benefit analysis? Who is performing the oversight while we continue to rack up trillions of dollars in debt that we have increasingly no hope of ever paying back, all the while spending billions on just the negotiations and talks around creating one of the largest new spending programs ever?

President Obama was going to get out his red pen. I’m sure you all remember the promise. I am thinking that he must have forgotten where he put it…

Posted by: Rhinehold at December 7, 2011 1:34 AM
Comment #332777

BTW, a few years ago we found ourselves with more economic regulations than our neighbors to the north, Canada. Can you imagine that, Canada is a more free place to live than the US now?

Posted by: Rhinehold at December 7, 2011 1:36 AM
Comment #332818

You ought to stop using WSJ opinion pages, if for no other reason that they are behind a paywall that non-suscribers like can’t read past.

The big problem is that the consequences of people’s actions aren’t purely economic, and if we only act when it doesn’t hurt the bottom line of any business, we’re essentially putting somebody’s enrichment ahead of the good of society.

You complain about corruption and cronyism, but making regulator reliant on the good graces and good fortunes of those who they’re regulating is an open door to such corruption, an incentive towards it. The truth is, you’re complaining about a system your party’s largely shaped, largely influenced, and proposing changes that would only deepen the problems we already face.

Posted by: Stephen Daugherty at December 8, 2011 8:54 AM
Comment #332819

The Republicans care NOTHING about the democratic process. Gridlock is their motto because doing noting obviously helps those now controlling peer and massive wealth. Republicans are consistently putting the interest of their party and of the rich before the interest of the country.

Posted by: muirgeo at December 8, 2011 9:38 AM
Comment #332831

LOL, yeah, the Democrats are about putting the country first…

Just two months after one of the most controversial parts of the Dodd-Frank financial-overhaul law was enacted, some merchants and consumers are starting to pay the price.

Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates—not lower—when their customers use debit cards for transactions that are less than roughly $10.

That is because credit-card companies used to give merchants discounts on debit-card fees they pay on small transactions. But the Dodd-Frank Act placed an overall cap on the fees, and the banking industry has responded by eliminating the discounts.

What is worse is that these things and others are totally foreseeable, but no one wants to see…

The democrats are no different than the republicans when it comes to wanting to control your life, just how they go about obtaining and using that power. If you want to continue believing that ‘the left is good and the right is bad’ if it makes you sleep better at night… well I should have put that disclaimer up at the top of this comment, shouldn’t I?

Posted by: Rhinehold at December 8, 2011 3:17 PM
Comment #332846


The fact that the cap on “swipe fees” has resulted in elimination of swipe fee “discounts” for small transactions and the recent failed efforts of some banks to impose a monthly debit card fee on consumers hardly negates the overall value of the cap to retailers and ultimately the consumer.

Until the imposition of the cap, banks virtually gave away the debit cards to consumers for free and then imposed an excessive swipe fee for their use on retailers. It was a hidden tax on transactions. Retailers were forced to accept debit and credit transactions with their fees or forgo the business. The “discount” for small transactions was nothing more than an inducement to encourage widespread habitual use of debit cards by consumers for all transactions with their excessive fees and profits for banks.

The fact that the true nature of these fees is now imposed on all transactions, including those under $10.00 is, in my opinion, a good thing for both consumers and retailers. Retailers can give a discount for cash. Consumers can decide whether to purchase with cash at a lower price or pay for the convenience of debit cards with an additional fee. Sounds very free market to me.

Posted by: Rich at December 8, 2011 7:20 PM
Comment #332848


It is great if consumers and businesses can decide what to charge and pay.

The problem comes when government mandates that some transactions be done at below cost. Some customers are just not worth it at certain levels. But when businesses try to cut them loose, consumer advocated complain.

We also have the example of sub-prime lending, that was the proximate cause of the recent downturn. It doesn’t make sense to lend to some people and/or some neighborhoods.

So indeed, let people and firms decide. That means that some people don’t get credit or debit cards or if they do costs are very high.

Posted by: C&J at December 8, 2011 7:29 PM
Comment #332852

“The problem comes when government mandates that some transactions be done at below cost.”


We basically agree. But, that was not the problem with the “swipe fees.” The credit and debit card industry had retailers and ultimately the consumer by the short hairs. The new Dodd-Frank financial reform “cap” does not mandate that banks transactions be done at below cost or that unworthy credit risks be given debit and credit cards.

Under the new law, the Federal Reserve is charged with establishing the rate of the credit and debit card “swipe fee” cap upon consideration of cost factors. From what I can gather, the new fee set by the Fed of 24 cents per transaction and some exemptions was a huge victory for the credit and debit industry. Considering that the transaction fee prior to the new cap was 44 cents per transaction, you can see the degree to which the banking industry was profiting from swipe fee.

Posted by: Rich at December 8, 2011 8:59 PM
Comment #332855

Tell me, what precisely creates the expense of swiping a card to electronically transfer money from one account to another, besides that which the banks charge for the privilege?

Given that so many people use debit cards nowadays to pay for items, does it not make for a problem for small businesses and vendors when one of the most popular means of payment for items becomes saddled with exorbinate fees?

I mean, there are actually small vendors I know who can’t afford to process debit card payments below a certain limit, because they just can’t make a profit on it.

How much business are they losing on small items because of the way the big banks and card companies load down the market?

Posted by: Stephen Daugherty at December 8, 2011 10:41 PM
Comment #332859

Rich, interesting logic. Not one I wholly disagree with though… Of course, I extend that logic to the hidden taxes we all pay on corporate taxation now and would rather see that money raised as a visible sales tax instead of a hidden tax that we can’t eliminate for the poor…

I wonder if your thinking extends into government taxation on business? Or just on bankcards applying fees and users being free to use them or not, making up their own minds if they are willing to pay that extra fee to use their cards (or find cards that don’t charge the fees).

You despise the free market deciding if the fees are worth it or not (I now many people, especially older ones, that only use cash for that reason) but most likely agree with the forced hidden taxes that get applied on businesses?

How do you set those two things next to each other in your political thinking?

Posted by: Rhinehold at December 9, 2011 12:54 AM
Comment #332864


The simple solution is to let firms, big and small, charge what they think is appropriate and the people to choose to buy products or not.

Why should government be able to set fees?

I have credit and debit cards. I have always used them in such as way that it costs me nothing. There was no need for new legislation to make this happen. Everybody could do what I did.


It is none of your business to estimate the expenses involved with this. Pricing is complex.

Actually - I think you will appreciate it given your background - the problem may be mistaking complex systems for complicated ones. Pricing is complex, so you cannot take into account merely the ostensible expenses involved.

But the bottom line is that people and firms have choices. As I wrote above, it is possible to get along well w/o paying much in direct fees. I understand that “somebody” pays, but it is incumbent upon them to figure that out and adapt their behaviors.

Posted by: C&J at December 9, 2011 4:22 AM
Comment #332865

Bull****. Pricing is complex? They’ve got accountants for that. Off the top of my head, I would say, “the electronics to process and store the transaction, the salaries of those who maintain the system, expenses for fraud, administration of merchant accounts.”

I’m sure they have other legitimate expenses tied to it, the question is, with literally millions of transactions daily, do they need that much money to turn a reasonable profit, and is it in the public interest to let them charge what the market will bear, especially since it falls hardest on those who employ the most people in this country?

Everybody’s got choices, but not all choices reflect working well and playing well with others. Now there should be a certain tolerance for self-interested behavior. After all, I don’t fix computers because I want to do that all day, I do that because I make money doing that. But you know what? Doing that helps me fulfill my wants and needs, and others do that too. If you have some people who are using their position as middlemen in a way that makes it more difficult for commerce to proceed smoothly, equitably, and honestly, I want the government to intervene, so that things run more smoothly.

There are a lot of things credit card companies have done to turn a profit that have just ended up putting people who were doing what they were supposed to in greater debt than they really understood they’d be in. To you, this doesn’t seem something we should be interfering with, but to me, this seems like folks turning an object of economic convenience into a lure to bring people into an intolerable situation that hinders their ability to to consume and do commerce reliably.

This really is a minor sin, but if they only have to charge a few cents to cover their costs, and the rest is really just premium, then they’re abusing their position as middleman at the cost of those whose own profits are of much lower margin. You talk of freedom, but has it occured to you that it isn’t just governments who can create unfair systems that inhibit commerce?

Posted by: Stephen Daugherty at December 9, 2011 8:03 AM
Comment #332867


I believe that hidden taxes and fees of all forms should be made more explicit in consumer transactions. Currently, the only explicit additional cost that consumers generally see is state sales tax on receipts. How can consumers adjust their spending methods and have a full appreciation of taxation and fees without such information?

Posted by: Rich at December 9, 2011 9:38 AM
Comment #332868

“I have credit and debit cards. I have always used them in such as way that it costs me nothing. There was no need for new legislation to make this happen. Everybody could do what I did.”


No, that is not true. It did cost you something for your “free” use of the cards. It was in the additional costs incurred by retailers in processing any transactions using those cards. That cost ultimately was incurred by you in the cost of the goods or services.

Posted by: Rich at December 9, 2011 9:47 AM
Comment #332888

Why weren’t the regulations followed with Goldman Sachs (Corzine CEO), MF Global (Corzine CEO), or Freddie and Fannie (asses covered by Frank and Dodd)?

As long as the CEO’s make the rounds for corporations to government leadership positions, and politicians get rich off insider trading; nothing will change.

As of April 2011, American corporations laid off 2.9 million people and these same corporations hired 2.4 million in foreign countries.

While Jeffery Imelt was being paid to create American jobs, GE was shipping them overseas, after Goldman Sachs took a $10 billion dollar bailout, they shipped 1000 jobs to Singapore, and now the ex CEO of MFG, ex CEO of GS, and the ex Senator of NJ, has no idea where $1.2 billion went.

And all of these cororations have overwhelmingly supported the Democratic machine; while at the same time Obama is attacking these corporations. Who is the biggest fool; the corrupt poilticians, the corrupt CEO’s, or the American voters?

Posted by: TomT at December 9, 2011 6:47 PM
Comment #332889


Your response is so … liberal/leftist.

You want to decide how much profit firms “need”. And you are using the old cost plus method.

I am honestly disappointed that you seem not to have picked up the difference between complex and complicated. That is why I addressed you I the manner I did. I thought that perhaps your interest in systems might overcome your partisan instincts. I know you have the intellect to understand, but you choose not to.

Your response to me shows that you consider that pricing is complicated but – as with complicated systems – can be precisely figured by accountants. I said that pricing is complex, which implied interactivity and adaption among different parts of the system. You may disagree with me still that the price is too high, but don’t give a “complicated” answer to a complex problem.

Of course I understand that it is not only government that tries to manipulate markets. But I understand – again in a COMPLEX system – that government interference tends to be the most persistent and that other players cannot maintain manipulative positions w/o government collusion. In many ways the regulations favor existing parties.

You have choices not to use your cards or to use them in smart or dumb ways.

Rich & Stephen

I use my credit card whenever I can. I pay no fees on it or on the transactions. This option is open to all with good credit records.

Let me add other variables that are in play. Many firms prefer credit cards to cash because it simplifies accounting AND it helps deter employee theft, both of money and goods, which is the largest area of inventory “shrinkage.” So taking cards might cost a firm in terms of fees, but may save money in terms of less pilferage or theft.

Prices are kept low by competition. The accountants checking receipts might tell the firm that the transaction costs are a bit higher (hence the need to raise prices) but they might also notice that employee theft is lower (hence the ability to be more flexible on prices or profits). If one employee is deterred from ripping off $100, that pays a lot of fees. As these lower costs spread through the system, profits will rise relative to what they would otherwise be. But in a competitive environment, prices will drop (or not rise as fast with inflation) as costs are reduced.

That is one reason smaller retail establishments, such as restaurants, encourage the use of cards. Quiznos is probably not worried that customers cannot come up with the $7 needed to buy an Italian combo, but they are aware that the credit card will move the line faster, avoid the problem of making change and help prevent the kid at the register from palming that $10 bill.

Posted by: C&J at December 9, 2011 6:56 PM
Comment #332893

“I use my credit card whenever I can. I pay no fees on it or on the transactions. This option is open to all with good credit records.”


The issue isn’t what credit or debit card holders pay for transaction fees. Most holders do not pay a transaction fee. It is retailers who pay a transaction fee on purchases with debit or credit cards. That’s by design. The credit card industry showered consumers with free transaction debit and credit cards. It encouraged use of such cards by consumers and forces retailers to take the cards and pay the fees or forgo the business. The credit and debit card industry having established a one sided deal then gouged businesses with undeniably exorbitant transaction fees. Ultimately, of course, the consumer paid for its transaction fees when retailers passed these fees onto consumers in higher cost of goods and services. As Stephen pointed out, is it so hard to accept that “it isn’t just governments who can create unfair systems that inhibit commerce?”

Posted by: Rich at December 9, 2011 8:19 PM
Comment #332894


I addressed your concerns above.

The use of credit card brings several cost saving advantages to retailers. Overall, it probably lowers total costs, which is why even retailers with many small purchases use them. Please see above.

Posted by: C&J at December 9, 2011 8:26 PM
Comment #332896

BTW - the new law is having the predicted effect of RAISING prices.

“Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates—not lower—when their customers use debit cards for transactions that are less than roughly $10.

“Merchants now are trying to offset their higher rates by raising prices, encouraging customers to pay in cash or dropping card payments altogether.

“Mr. Scherr, the coffee shop owner, says that debit-card fees at one of his five stores rose to about 4.5% of sales from 3.5% of sales in the month after the new law took effect. “It’s a killer for me,” says Mr. Scherr, who estimates that 95% of his sales are under $15.

“In the meantime, Mr. Scherr is weighing whether the expense of an ATM would justify its installation. If he gets one, he says he plans to “stick a sign on top of it, calling it a ‘Durbin ATM.’”

Thank you Barney, Dick & Chris for pushing us back into the age of cash and raising the costs for us all. Another example of stupid politicians pandering to even stupider people trying to get something for nothing.


The problem with those who advocate more government is that they just don’t understand the dynamics of the systems they are asking to be regulated.

Posted by: C&J at December 9, 2011 8:47 PM
Comment #332897


Perhaps you could explain how reducing swipe fees from 44 cents per transaction to 21 cents per transaction has increased overall costs to consumers? Oh yes, it is the elimination of the “discount” that the credit card industry so generously provided merchants on small purchases while gouging them and ultimately all of us for all other purchases. So, now consumers understand the actual fees associated with purchases. Very bad. Very bad that the actual cost is reflected in their purchase price.

As for the dynamics of the system regulated, perhaps it is time that consumers understood what has been happening with transaction fees and how the credit card industry manipulated the system for their benefit.

As for pushing us back to the age of cash, that is hardly the fault of Dodd-Frank. Why are cash transactions less costly? Is that the fault of Dodd or Frank? Is a merchant crazy for offering discounts for cash purchases? Is a consumer crazy for buying an item without additional transaction fees? If credit/debit arrangements are more efficient, why is that reflected in cost of transactions?

Posted by: Rich at December 9, 2011 9:21 PM
Comment #332898


You have to look at the whole system, but understand that parts can cause trouble. Transaction fees are easily measured, which is why they people react. The bigger picture, the slower but more important part gets ignored or cannot be handled.

The ostensible cost is reflected in the purchase, but the actual cost is not, because the actual cost is longer term and harder to measure.

The type of thinking you are talking about is exactly why government management of market systems always leads to poor results.

I do have to take it to the extremes to make the point. The Soviets, Nazis and others believed that the state should control economic activity. They spent lots of effort figuring out what people SHOULD pay and what profits were fair. They punished those who “gouged”. The result was the creation of black markets and even they were insufficient to make things work.

We won’t go the communist/nazi/fascist route in the U.S. I am not saying that. But their pathologies can already be seen in the small way in the immediate results.

Next time I go to Quiznos, they will be less enthusiastic about credit cards. The lines will move slower as customers dig in their pockets for change. Some employees will more easily steal money or give free food to their friends. Prices will rise for the products we buy but we will all be able to take solace in the fact that the higher price does not include a swipe fee.

Posted by: C&J at December 9, 2011 10:08 PM
Comment #332918

You’re funny. Corzine was a former Goldman Sachs CEO. So was Hank Paulson, your former Treasury Secretary. As for Fannie and Freddie, your front runner for the GOP nomination, or at least the current replacement for Mitt Romney, did millions of dollars of business with them.

And that would be meaningful if the bullabout Fannie and Freddie was actually meant anything.

A little refresher here. If somebody builds up a big bubble of bad loans, who are we best advised to blame? I’d put my money on those who had the largest market share, those whose sales were growing, those who had the least regulatory burden. I would look at actual market share numbers, because that would distinguish who actually inflated the bubble from those who only got caught in the aftermath. You have to remember that the housing market failed first, then the non-bank lenders like Countrywide and Ameriquest went under, then the credit markets started to sieze up, and then, only after all that crap went down did Fannie and Freddie finally go into conservatorship.

As a matter of fact, their failure was one of the last failures to occur, almost right before the failure of Lehman Brothers. You would put that as a cause, but then we’re talking about the housing market here, and Fannie and Freddie were only involved on the back end of that market, the mortgage security market.

They used to dominate. Then the Non-bank lenders came along and more or less reversed the market share on them. Which is to say, that when the bubble inflated, it was inflated as time went on with fewer and fewer of Fannie and Freddie’s mortgages. In fact, if somebody had stepped in and reformed mortgage origination, they might have seen their market share increase. As it was, they were prohibited from buying mortgages of the kind that the non-bank lenders could snap up.

That’s your theory: that a crisis basically caused by excessive availability of sub-prime mortgages, enabled by regulatory deficits that primarily benefited the private lenders, and supercharged by a bubble they got less and less of a piece of over time are the culprits behind that bubble.

Ah, but of course, it lends the nice flavor of big government to this, which you find it easy to oppose.

Likewise, you blame the Democrats for jobs shipped overseas, (by singling out one advisor), even though your entire Senate delegation (more or less) united to oppose new laws closing loopholes that allowed jobs to be shipped over seas. More to the point, you oppose many laws that would directly develop jobs here at home, ah, but if one Democratic advisor takes your point, then we’re all to blame, aren’t we?

Funny how your policy money isn’t put where your political mouth is. However imperfect Democrats may be (imperfect, I might add, by your encouragement during the nineties), they’re not so heavily invested, even now, after the catastrophe, as your people are.

The fools are those who, even after all that has taken place, still think that the paradigm everybody was following during the last decade needs to be continued. The fools are those who even in the face of mountains of evidence of how corrupt Wall Street has gotten, still support the system. Now that might somewhat contaminate my party, and my Presidents advisors, but really, who is putting forward an extra effort to throw a monkey wrench into the process of reform? Who’s insisting on a red-herring explanation of why things went wrong, even while the dangerous financial chicanery that locked up our economy continues on?

Your response? It’s such a rationalization. Profit is always determined from need. If you can take care of your needs, then everything on top of that is pure profit. If you don’t know what your needs actually are, if you’re uncertain, then your profits are uncertain, and perhaps you should hire somebody else to do your accounting for you. I mean, if this level of uncertainty reflects how those finance sector companies operate, then we know how it is they were so foolish as to get themselves in trouble now, aren’t we?

You hide behind complicated systems as a way to avoid having to deal with the character of their decisions, as a way to avoid admitting that the charges could very well depend upon nothing more than what they think the market can bear.

The credit card companies, by the way, went out of their way to make sure that many people’s credit ratings were undermined. They shifted around dates for payment without telling people, they added on additional fees without telling them, increased interest rates based on failures to pay unrelated bills, and so on and so forth.

This is important because it reflects the same kind of scam that was going on with mortgages. Rather than encourage good behavior, their system was meant to prevent folks from maintaining good credit. They also deliberately targeted people who were credit risks, including folks who went through bankruptcies and folks who were college students.

Why would they do something like this? For the same reason why they would give somebody with no real credit or forms a big mortgage. What they were after was not an honest ability to pay, but rather a pretext for getting folks to owe them as much as possible so when they sold off these bad debts, they could get as much as possible for those bad debts.

To do that, though, to expand that market beyond the high-risk investors, they had to do what they did with mortgage securities, which was to launder the risk with derivatives.

In essence, mortgages were just one kind of bad debt they were pulling this kind of scam with. They did this with just about any kind of debt you can imagine, and your regulations laws, your hamstrung enforcement agencies couldn’t stop them.

You want complexity, I give you complexity: a complex system whose basic function was to feed Americans billions and trillions of dollars in their own bad debts, and keep the system alive through the sheer denial of what the implications of that debtload were. So, the folks on Wall Street reaped billions in profits, other businesses grew flush with the money that those bad debts paid for, and everybody was happy until such time as everybody was forced to recognize the paralyzing level of bad debts, not to mention the real world effect of having so many homes foreclosed on, and the bubble burst.

You want complexity, I give you complexity: the inhumanly complex and ultimately ethically depraved system that your free market economics helped to create. This is what happens when the market is allowed to police itself. People keep secrets, they pull scams, they decieve others for the sake of competitive advantage, and the system works to preserve itself even after it’s obvious that the whole thing reflects a blatant, big lie.

Unfortunately, because of that twisted system, when everything failed, when the other shoe finally dropped, the consequences were thousands of businesses, otherwise successful business, failing, and millions of Americans losing their jobs. And why? Because reality wasn’t good enough for Wall Street. Getting people with good credit histories, like yourself, and keeping most lending to them, wasn’t good enough. It didn’t make them all the money they felt they deserved to make, and businesses wanted more economic activity than failing to give people good wages was going to allow them to get.

In this kind of world, the American dream is a lie, a fiction that overlays chronic debt, and a situation in which many people can keep their heads above water without cheap and easy credit-

Which is now a thing of the past.

I’m interested in making sure that when things get complicated, it’s for a good reason. You talk about my response being liberal/leftist, but that’s just a red herring. Me, I’m a pragmatist, a student of complex systems. They’re not simply opague.

I mean, the mess on Wall Street is very complex, but a lot of it has to do with one intuitive truth: they needed the broadest possible market to sell off bad debts they knew that others would not knowingly buy into, given the risk.

They had to do some pretty horrific manipulations in order to convince people that the investments were acceptable products for them. Without your lack of regulation, many of these manipulations would have been illegal, and the market’s own processes would have prevented the problem. People can and will act in their own interest, and the market will reflect that. The problem is when you let practices go on that obscure things, or that allow small problems to get bigger.

If so many banks hadn’t merged, we could have let the worst offenders collapse, and suffered only a minor level of economic turmoil for it. If derivatives were traded openly, and accounted for better on the books, the toxic assets would have sent up red flags long ago, and the market would have curtailed that behavior.

If the ratings agencies were better regulated, and stricter standards applied, the market for these substantively high risk secondary mortgages would have remained small, and that itself would have discouraged the lenders, non-banks and otherwise.

And, if you hadn’t allowed so much predatory lending to start out with, if those high pressure salesman and enablers of real-estate speculators had been curbed, the bubble would have been a much smaller one, anyways.

It wasn’t just one thing, or one regulatory failure, or one company (or two, as you allege) that were responsible for this. From where I’m sitting, there were dozens of regulatory failings that allowed the spread of this problem, it’s byzantine lack of clarity, and the continuation of its development, unhindered by the market’s natural defenses.

Your people believed that the market would not run out of control, if it was given the freedom to regulate itself.

My experience, though, is that systems that rely on adaptation, self and otherwise, don’t necessarily stay tame. They can go wild, and like creatures in the actual wild, they can end up adapting in ways that don’t line up with honest and socially responsible behavior, as we poor humans define it.

Social darwin presupposes that human behavior evolves towards some optimum, but in truth, with a complex system like that, and with human intelligence factored into it, the ability to get creative if you will, we see less in the way of perfection by complexity, as we see the development of novel ways to do the same things humans have always done, good and bad.

For me, the idea is preserving the freedom to do the good things, to respond appropriately to the complex real world, while discouraging bad behavior and dishonesty. We need to do that because if we let bad behavior and its complexity increase, we end up in a scenario not unlike the one we have right now, with the complexity of the market reinforcing a bad situation, after that complexity collapsed into a bloody mess. I know what the attraction of a system that puts low demands on human judgment, particular that of those who govern us is to people, but unfortunately, even though we’ve tried to govern ourselves in such intuitive and simplified ways, it hasn’t worked out like we wanted it to.

I would have been pleased as anybody else to find out that we could do better in governing our nation with less. But I’m not going to insist on waiting until hell freezes over to watch such a system succeed, if it looks like it’s not doing that. At some point, I’m going to say, our experiment with self-regulation here, self-policing didn’t work out like we thought it would.

And I’d say the same thing if a law were involved. To me, the idea is that rather than blindly defend one kind of institution or the other, government or business, we seek the best relationship on a practical level that we can find, and we try and avoid situations where one corrupts the others. Believe me, I’m not a fan of many of the things Dodd and Frank did before the economic crisis. But that extends to many politicians, and not Democrats or Republicans in particular. Democrats, at least, have some recognition, though, that things are going to have to change, that the experiment failed, and the people are demanding better.

Your people? You can’t admit that you placed a big bet here and lost, and that you can’t cling to the ideas you once depended upon. You’ve made not changing your minds such an overriding virtue that you’re not going to allow yourself to adapt to what most other Americans want: a return to accountability for both the government and the private sector alike, an end to the level of corruption that’s built up over time. People want their government back.

Posted by: Stephen Daugherty at December 10, 2011 2:08 PM
Comment #332919


Please COMPLEX. I really thought that you could understand the difference between complex and complicated. You tend to write as if you understand such things.

If it was merely complicated, you would be right. If the world was merely complicated the leftist prescriptions could work if they could just gather enough data and have enough computing power. That is what the Soviets thought with the Gosplans. They ran into the problem of complexity.

Complex systems do NOT stay tame. They are subject to varieties of outcomes not proportional to inputs. I would prefer to have a complicated system to work with. But we don’t. We have a complex system. We have to apply adaptive systems to adaptive systems and understand that we are never in complete control.

This does not mean that we do nothing. On the contrary, I advocate applying methods that can actually limit what risks we can and make things move more smoothly. But the tools your propose are not going to do the job.

The system your tools were set up to manage died in the 1970s. It was a good world in many ways, but it ran out of steam.

I think things are going to have to change. But the change will have to be in the direction of MORE adaptive systems, not stricter control.

A separate subject - and I truly mean this as a colleague. I think you might enjoy the study of complexity.

Posted by: C&J at December 10, 2011 2:33 PM
Comment #332936

Complexity is one of my pet subjects. From critical phase shifts to chaos theory to synchronous behavior to emergent behavior, it’s long been a study of mine.

What it’s taught me is that complex and incomprehensible are not the same thing. You can design laws to deal with emergent and chaotic systems like markets. In fact, you must, because if you just leave things to themselves, they can evolve in unexpectedly negative ways.

If you look through my responses to you, you’ll get some idea of my though processes on it. With the recent financial crisis, it wasn’t just one thing, it was a number of failures of the market to function ideally that fed into it. That’s what makes the focus on the failure of Fannie and Freddie and the attempt to scapegoat Dodd and Franks for everything such a misleading red herring. You could have regulated Fannie and Freddie much more closely, but all that would have done would be to kick more mortgages to the private companies, the companies who went under a year or two before Fannie and Freddie.

One thing you’re going to have to education yourself on is that some systems are irreducible, that is, not predictable from constituent behavior alone. If you were to look at the bad loans that were being given out, your first impulse would be to say, “How could they be so stupid? Didn’t they know that they’d take a bath on the loans?”

Ah, but if you sell off that bad loan, it’s somebody else’s problem. Same thing if you’re talking about deliberately tanking the credit of somebody who’s paying you back on time. Shouldn’t you want to keep them capable of paying you back? Well, not if you can sell off their debt and make an immediate and instant wad of cash.

Of course, then the question becomes, wouldn’t people start taking baths on the loans in question, and stop buying (leaving you holding the bag!) Well, that did happen, eventually, but two things kept that from being an immediate problem. For one thing, one group would sell the bad debt to a firm, and then the firm would sell it on. Instant profit again. For another thing, folks weren’t honest about the risk, getting the rating companies to rate their debt securities safe.

There is, of course, a limited market for high-risk debt. Not so for low-risk debts, like treasury bonds for instance. So, they slap a derivative on it that insures the company against the failure of the debt.

Individually, that might be safe, innocuous. It’s not necessarily a bad thing to hedge your bets. Unfortunately, this was done repeatedly, en masse, helping ensure that it was possible for the debt to build up like that

So what do you have so far? You have a series of normal market safeguards, but then you have counterbalancing and not uncommon tactics employed to disable the safeguards. The disabling of many different safeguards allowed the bad debts to be increased, and in fact served as a perverse incentive to help consumers generate more of them, rather than do what they’re supposed to and guard against that. More to the point, because of the nature of the non-bank lenders, they weren’t subject to the limitations on leveraging that traditional banks were. Of course many of the banks that failed were nominally normal, but because of specific regulations and laws that were repealed and struck down, even they got caught up, because they were allowed to have companies attached to their overall operation that were more risky than they were allowed to be.

That all leads to a systematic failure in the financial sector. It’s more than just the sort of moral hazard that your side focuses on so disingenuously by alleging it was simply a matter of letting poor people get more home loans. That, by the way, is the truly despicable part of a lot of this. The old cards of deserved poverty have been trotted out, and even the race card with the CRA. (which, by the way, didn’t apply in full to most of the institutions that lead the charge into the housing bubble)

So why this drastic oversimplification and distraction?

It’s as simple as avoiding ideologically unwanted reforms, and a return to a paradigm of market regulation you don’t like. Unfortunately, one way or another, I think it’s an untenable position. If the evidence doesn’t convince most Americans reforms are needed, another crash will convince people. You recall how long it took for the financial sector to recover from the Great Depression, how long it took for conservatism to fully spring back to where it was?

One lesson you can learn from the study of complexity theory is that it’s very easy to walk into a situation in politics, where, unfair or not, the critical mass of politics weighs in against you. Faced with that, it is an incredible slog just to get back into the good graces of the people.

You look at the Tea Party, and you see a stellar success. Me, I look at it, and I see a Republican Party that got back up on the horse far too soon for its own good, and now has to deal with one problem compounding another: first, that neither time nor political reforms have had the chance to undo the damage that the failed policies have inflicted on America, and second that the political rigid-mindedness and fervor required to bring the party back this fast is not so easily undone.

It’s like a person walking back into a room after some social blowup, and a lot of people are still angry at them. So what do they do? They start pushing their side of the story, trying to get others to buy into it. But that doesn’t keep the folks who are still skeptical about them from getting even more skeptical, nor does it make it easier if the mood of the people in the room turns the other way once again, because now that person has only two obvious choices: give up on trying to restore people’s opinions, or engage in a possibly futile pursuit of trying to steer people’s opinions back.

They could just realize what a pickle they are in, and try to sweet talk and make gentle rather than hard concessions, but then the problem is they’ve pumped themselves up into a state where they don’t want to back down, or engage in such measured political negotiation. It’s not easy to become the top dogs and then get used to having to be part of the pack instead.

You can call the GOP crazy, stupid, or whatever, but I think they’re human. Human, and caught up in a situation that’s not made better by the overall psychological tendencies of the group, the insistence on casting this as an ideological battle for the nation’s survival, the insistence that not one inch can be given up in the conflict with other political forces, so on and so forth. I mean, the Republicans and conservatives in this country have many better choices they can make, but they’re not willing to make them, so they might as well have no choice at all.

Rigidity does not always mean strength. If you can’t bend, you break when the critical mass weighs in against you. Of course, you don’t want to be so flexible that you deform permanently under stress. The key is to have both elastic, adaptational properties to your organization, as well as the stiff backbones.

The problem for modern Republicans is that the party is run in such a top-down fashion, for the convenience and the agenda of those who run the conservative movement, that dissenting voices don’t have the chance to add the right metals to the alloy to increase its ability to recover from situations where the old policies become strained or discredited. I mean, Republicans don’t even really have a moderate alternative to their no-tax pledge. In a time where the middle class are the last people you’d want to raise taxes on for either economic or political reasons, your side seems intent on dumping the tax burden more and more onto the shoulders of the majority of voters, not to mention the people who are least able to take on that burden. I mean tax breaks for the rich and the corporations have not been popular for quite some time, and with folks on the unemployment line, getting medically disabled, or otherwise struggling, why would you tell them that they have to pay for a mistake that wasn’t largely theirs to begin with?

You can moralize it to them, but that won’t help you sell things to them all that well.

The Republican Party needs to realize that it’s like one of those comically overburdened bellboys you see in the movies: more and more baggage stacked on them that they can’t get rid of.

Now either that stuff’s going to fall over, and you’re going to get hurt (it’s already happened to a certain extent) or you’re going to have find a way to offload things. If you want to be honest with yourself and others, you’re going to have to realize that the value of the market is not that those who are right can perfect the market place, but that choices are correctible, for the most part. When the blind pursuit of success by rhetoric and political browbeating takes one far enough, you can lose that ability to discard what fails, and embrace what works. Just look at your Presidential lineup. You’re not being left with a lot of good choices, in no small part because the rigid nature of your party isn’t allowing for moderates to come forward who can both influence Americans towards conservative ideals, but also adapt to the ways in which things won’t fit those ideas in the real world.

Posted by: Stephen Daugherty at December 11, 2011 9:31 AM
Comment #332937


Finally, we are actually talking about the correct subject. I knew you would come through.

We can indeed design laws and rules that address complexity, but they need to be flexible and we have to understand that they will address the problem but not control or solve it.

Situations will sometimes evolve in unexpected ways. We cannot control them. The best we can do is design systems that are robust enough to absorb the unexpected changes.

You seem to understand complexity in the academic sense, but you still treat the economy as a complicated system. You still see things as black and white, with Democrats as good guys. You seem to understand that there are lots of factors and player involved in interactive relationships, but think that it is all and only Republicans who account for the unwanted results.

In a complex system, can you really do these things?

Nobody is advocating “going back” to anything, except maybe some Democrats who want to go back to the regulatory environment of the 1970s. We do not have that option.

Re the tax burden - according to all recent studies, the rich pay a greater % of the taxes than they did in 1979. The RATES make little difference. What counts is how much you can collect. This is another example of complexity. If you change the rates, key players change and adapt their behaviors.

RE the Tea Party - I don’t agree with all the ideas of the TP, but I think they did the great service of stopping the Obama big-government juggernaut. I thank them for that.

RE the Republican being “top down” you and others typically say that the Tea Party is unorganized and you ridicule the various Republican candidates for not being able to get together. You say Republican voters cannot make up their minds. This certainly does not sound top-down.

So you have a choice. Do you think the Republican Party is top-down, or do you think that they are poorly organized and confused? And if you think it is top-down, could you please let us in on who is on top?

Posted by: C&J at December 11, 2011 10:29 AM
Comment #332982

I understand it in more than an academic sense. Note how I give examples of the financial mechanics that helped build the bubble, and which lead to Wall Street being so overleveraged.

It’s you who speaks in general terms about this. The fact that things are complicated, or that complexity theory might come into play isn’t interesting. Complexity theory can come into play for just about anything.

The question is, how?

Take a look at the way the business community evolved over the last decade. The expectation was that the fear of negative consequences would deter the big banks and other financial sector institutions. The assumption was that profitable behavior and healthy, moral financial behavior would align.

Unfortunately, what did happen, the “is” if you will, did not happen as it “ought” to have happened. Rather than motivating them to come clean, and stop risky overleveraging and deceptive transactions with those toxic assets, it motivated people to conceal such behavior, deceiving their investors, preventing outsiders from understanding what the insiders were doing.

Look at Enron. The same thing happened. The response of their people to the market, rather than being an increase of care and honesty, became the opposite.

That, to me, is an argument for regulation and law. If social pressures towards good behavior, towards transparency and honesty are not enough, we shouldn’t continue to make naive assumptions that aren’t followed through with actual results. That’s what government is for: compelling obedience to what is good when the attention of society and its disgust with such behavior is not enough to convince people to stop doing it.

As for the GOP?

I guess the best way to put it is that your party is very organized politically, but is ineffective policy-wise. It’s effective at keeping things from being done, but ineffective at getting actual things done.

You can give me that rhetoric about being thankful that they stopped the big government juggernaut, but in truth, they’re not going to get a lot of thanks for that gridlock. They’re not going to make a lot of people happy, even if they can make sure that nobody’s happy with the Democrats, either.

Sooner or later, people want effective change out of the government. If that’s complicated? Well, nothing’s simple anymore. The internet, by definition, is extraordinarily complicated. That doesn’t mean we shut it down. Business in the real world is very complicated. Doesn’t mean people stop it. Governing in the real world is complicated. Doesn’t mean we should end that.

It means we need to develop a more mature perspective on the world, accept its complexity, and learn from our experience in dealing with it. The trouble, as I see it, is that in pursuing the special interest’s agenda so zealously, the Republicans and the special interests have inadvertantly conspired to make each other poor performers in terms of dealing with that complexity.

People are getting hurt because of that, and regardless of whether they fully understand the problem or not, they want them dealt with. They want this country back on its feet, and themselves with it.

Posted by: Stephen Daugherty at December 12, 2011 3:01 PM
Comment #333037


Apply regulations that break up big banks. I like that. Make rules that limit compensation for executives involved in financial institutions bailed out by the government. I like that too. When the Obama Administration had the opportunity to do this, using administrative methods not requiring legislative approval, they did not do it.

My complexity argument has to do with your evident belief that when unexpected things happen that there must be a clear villein. There are indeed villeins, people like Barney Frank and the people in charge of Freddie and Fannie are villeins. So are the people at AIG, many of the same ones who Obama folks allowed to get bonuses. Many of the guys at Goldman Sacks were bad actors. The Obama folks allowed them to get 100 cents on the dollar on the risky investments they made - at government expense.

So if you want to look at complicated - we have lots of villeins, many Democrats and in the last couple years ALL protected by the Obama folks.

Is that the kind of thing the people were asking for?

Posted by: C&J at December 13, 2011 5:35 PM
Post a comment