I’d like to note Lawrence Lessig’s writeup of Wednesday’s conference (sorry about the bad streaming/sound online some have told me about; we’ll have video up by presenter very soon with some comments):
An angry earnestness was the tone of the day…This is a profound denial. The gambling on Wall Street was not caused by the equivalent of errors in arithmetic. It was caused by a corruption of the system by which we regulate those markets. No true theorist of free markets — and certainly none of the heroes of even the libertarian right — believe that infrastructure markets like financial systems can be left free of any regulation, including the regulation of rules against fraud. Yet that ignorant anarchy was the precise rule that governed a large part of our financial system. And not by accident: An enormous amount of political influence was brought to bear on the regulators of these core institutions of a free market to get them to turn a blind eye to Wall Street’s “innovations.” People who should have known better yielded to this political pressure. Smart people did stupid things because “the politics” of doing right was impossible.
Why? Why was their no political return from sensible policy? The answer is so obvious that one feels stupid to even remark it. Politicians are addicts. Their dependency is campaign cash…Not a single presentation the whole morning focused this part of the problem. There wasn’t even speculation about how we could build an alternative to this campaign funding system of pathological dependency, so that policy makers could afford to hear sense rather than obsessively seek campaign dollars.
A few authors mentioned campaign contributors at a few points, especially Rob Johnson. But we didn’t spend a lot of time on it, even though it’s really important. Let me walk you through the example I use for friends when I describe the stakes for lobbying with financial reform. Let’s talk about Chapter 10, former CFTC Deputy Michael Greenberger’s Out of the Black Hole: Regulatory Reform of the Over-The-Counter Derivatives Market.
After a long period of discussion in the public sphere, where disinterested actors deliberated using the common reason of all citizens in a pluralist society…just kidding. In December 2000 during the lame duck session Phil Gramm snuck a 262 page bill, the Commodity Futures Modernization Act, onto an 11,000 page omnibus appropriation bill. It was presented to the Senate for the first time on the day it passed. Some people who previously tried to simply point out that this overall direction might cause problems, because it may lead directly to AIG situations, were humiliated and pushed out.
(Humiliated and pushed out by the same people who are currently running the National Economic Council. I often think about the spring of 2008, where I went door to door and phone call list to phone call list for Obama because I thought it was one of the most important things to keep Hillary Clinton from having the Hamilton Project clique of people who deregulated the financial economy in the late 1990s from being near the response to the oncoming financial disaster, and instead to let Obama have Paul Volcker run the liquidation of Wall Street post-crash. Heh. I am many things, but I am not very saavy.)
So we ran an experiment in deregulation, and the experiment failed, as they often do. So why don’t we just not do that, broadly speaking? You can read the chapter for specifics on what to do, though everyone knows what to do. We flipped a switch in 2000, why not flip it back?
Well it would cost some very connected people a fair amount of money. According to an estimate by Sanford C. Bernstein & Co., this reform would cost JP Morgan $3 billion dollars a year. ICAP estimates that this reform would also expand the market for derivatives. JP Morgan is run by Obama’s favorite banker, Jaime Dimon.
How much would you spend to preserve $3bn a year in rents over the economy? $100 million? $500 million? $1bn? If you’ve taken Economics 102, you know that an oligopolist produces too little of a good, and charges too much money for it. And with this reform, you’d see the spreads narrow and the market mature and expand. But it would cost the top insiders a lot, perhaps around $20 billion dollars a year when you take them all together. You can argue the dollar amount, but that’s the approximate order of magnitude. These are just extra spreads and not extra value, so those costs get passed along widely across all people in end prices, people who are very difficult to organize productively to be a counter-balance to the concentrated lobbying efforts.
Let’s say the financial industry ends up spending $500 million dollars in lobbying during a two year period of 09-10. It’s going to be a lot more. Let’s say they did that just to kill Chapter 10’s derivatives reforms, though there are many other reforms that are being killed. And let’s say that this effort got them a really nice loophole in the House Bill and will get them no derivatives reform in the Senate, so virtually nothing in the final bill. So that’s $500m to preserve $20bn/year for 2 years = $40bn.
I have renter’s insurance, and to use a pun, I think of the lobbying efforts as an insurance on rents over the real economy. Paying $500 million up front to preserve $40 billion dollars of rents over two years is a 1.25% premium for insurance. That’s pretty good. It costs me right around $125 dollars to get renter’s insurance over $10,000 worth of stuff in my apartment, also a 1.25% premium. And I have a deductible!
Do you have renter’s insurance? Personally, I just like the peace of mind for my record player and computer stuff that comes with it. And I completely get the lobbying efforts, because having peace of mind over the rents you can extract from the real economy is also very valuable. And at this scale, it’s difficult to imagine Congress being able to resist this amount of money and there’s plenty more where it came from. So check out Fix Congress First if you haven’t already seen it.