Oh no. I can see by just talking about the dynamics of financial reform I’m depressing Kevin Drum. Cheer up: It took 30 years to deregulate the financial industry, it’s not going to be an overnight job to build it back.
But there is a positive thing to remember: Good financial reform is the thing progressive values do the best.
Financial Reform and Progressive Values
Have you heard the phrase “sunlight is the best disinfectant”? Do you know where it comes from? It’s from the progressive Supreme Court Justice Louis Brandeis, but it isn’t from a court case. It’s from a book he wrote in 1914 called Other People’s Money, and the quote is entirely about financial reform. Brandeis was a progressive, like the kind you see on Glenn Beck’s chalkboard. And this book came out as a collection of a series of articles he did on financial reform in Harper’s magazine. He uses “publicity” the way we would use “disclosure.” Here’s the original quote (my bold):
Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman. And publicity has already played an important part in the struggle against the Money Trust. The Pujo Committee has, in the disclosure of the facts concerning financial concentration, made a most important contribution toward attainment of the New Freedom. The battlefield has been surveyed and charted. The hostile forces have been located, counted and appraised. That was a necessary first step—and a long one—towards relief. The provisions in the Committee’s bill concerning the incorporation of stock exchanges and the statement to be made in connection with the listing of securities would doubtless have a beneficent effect. But there should be a further call upon publicity for service. That potent force must, in the impending struggle, be utilized in many ways as a continuous remedial measure.
Check that out. The phrase “sunlight is the best disinfectant” comes from sound progressive financial reform, and it specifically invokes the creation of exchanges to handle whatever shadiness the financial industry could be cooking up. Exchanges! That’s the problem we face now, a powerful financial industry with a huge amount of clout, and one of the solutions we need is the same exact one – get as much of the over-the-counter derivatives market, your Enrons and your AIGs, to be trading on exchanges as possible. Brandeis knew this was the way to take care of the problem, and the full argument draws explicitly on his ideals of democracy and free speech. And it is a radical idea – to trust information and public scrutiny to act as a means of policing the financial markets. And it works.
And it’s a place only liberal and progressive values can take us. Check out how crazy the argument is: “the system is corrupt, and the only way to fix it is to create broad-based participation in it on equal terms.” On the first read that makes no sense. If it is corrupt, then we should smash it with a hammer. Or, especially in our times, it’s not corrupt. The lack of access is a result of the participants being part of a genetic-merit-aristocracy, and to disrupt this natural equilibrium would be akin to attacking nature itself. How can you trust people to participate? Only liberals and progressive can formulate a language that trusts democracy, trusts the people once they are put on equal footing, trusts the notion of broad-based access and equal participation as the best disinfectant, the “most efficient policeman.” And that requires regulation to set the terms of participation.
Though Elizabeth Warren’s MMBM speech takes first place, the second best defense I’ve read of the CFPA comes from the same chapter of Brandeis’ 1914 book:
The archaic doctrine of caveat emptor is vanishing. The law has begun to require publicity in aid of fair dealing. The Federal Pure Food Law does not guarantee quality or prices; but it helps the buyer to judge of quality by requiring disclosure of ingredients. Among the most important facts to be learned for determining the real value of a security is the amount of water it contains. And any excessive amount paid to the banker for marketing a security is water. Require a full disclosure to the investor of the amount of commissions and profits paid; and not only will investors be put on their guard, but bankers’ compensation will tend to adjust itself automatically to what is fair and reasonable. Excessive commissions—this form of unjustly acquired wealth—will in large part cease.
But the disclosure must be real. And it must be a disclosure to the investor. It will not suffice to require merely the filing of a statement of facts with the Commissioner of Corporations or with a score of other officials, federal and state. That would be almost as ineffective as if the Pure Food Law required a manufacturer merely to deposit with the Department a statement of ingredients, instead of requiring the label to tell the story.
There it is, a call for disclosure based consumer financial reform. This is why Elizabeth Warren states that she loves contract law right at the beginning of her speech – because without things like this, contracts aren’t really doing what they should be. What’s amazing to me is that at the time, this was considered nuts. “How can you have the government just trample around in this market requiring people to disclose things like commissions!” This argument, that there should be required disclosure of information and then let people decide themselves, would have been whatever the 1914 version of ‘not saavy and not centrist enough’ was.
But he was right, and they were wrong. We can tell because we see how disclosures are an integral part of what makes markets work. And when we hear arguments about how consumer finance can work without disclosures – moral arguments like “you can’t cheat an honest man” – they make no sense to us. (Trust me, you can cheat an honest man.)
And 30 years before The Road to Serfdom, here he is catching how information is what markets do, and if financial firms can control the terms of how information gets to the market they can distort and create huge imbalances of power through information asymmetries. So where’s the liberaltarian love on financial reform? Just sayin’, we could probably use some friends in the weeks ahead.
The same arguments would go on to help Brandeis form the greatest defense of free speech in our country’s history (“the remedy to be applied is more speech, not enforced silence”), but the very first stop for these strong progressive, democratic ideals was financial reform. And they still hold up today.
The New Deal
These arguments from Brandeis formed the core of the New Deal financial reforms: The Securities Act, the Securities Exchange Act, FDIC, Glass-Steagall. These bills got it. When you read books about a crisis of new deal liberalism like The End of Reform, there’s not really a crisis abut the financial reform part, it’s a crisis about spending and the NIRA. If you watch people like the Amity Shlaes crew doing New Deal revisionism, they tend to stay away from financial reform. And as well they should. Milton Friedman is a fan of FDIC insurance. (People sometimes go after Glass-Steagall, which is fine.)
But there’s been a giant move towards financial deregulation. And these acts themselves, the ones that remained anyway, have grown stale. So they need to be updated for the 21st century. And that’s how I view financial reform.
Resolution authority is just an updated FDIC, a fantastic form of social insurance in which financial collapses don’t cascade and destroy the real economy. The CFPA is just an updated Securities Act, the act that established Brandeis’ idea of information as being the policeman of how consumers interact with financial reform. Derivatives reform is the new Securities Exchange act, Brandeis’ idea that sunlight is the best disinfectant when it comes to whatever the latest exotic financial instrument is. A 21st Century Glass-Steagall is a series of supplemental regulations – balance sheet reform, securitization reform, capital ratio reserve, ratings agencies reform – to put the shadow banking sector under as much sunlight as we can find. This spirit is what animated me for the report I helped put together on financial reform.
And if you notice, the conservatives who get it think in exactly this way. The economist Luigi Zingales is in favor of exchanges. Jim Manzi, god bless him, in his big piece centered his financial reform around the idea that “we should therefore adopt a modernized version of a New Deal-era innovation…” Nicole Gelinas’ After The Fall opens with a description of how the New Deal financial reforms worked and ends with solutions that are very similar. (To the progressives, it’s ok that they are using our language for financial reform – we need to have a big tent on these things.)
I get the sense that they are outnumbered and increasingly outflanked by those who want to see the banking sector of 1874 come back, people motivated by the Ron Pauls. And though I do enjoy seeing people like David Frum scramble to argue against things like the gold standard to the new wave of conservatives, I think this course is a bad idea in and of itself compared to our ideas, and a bad idea because it isn’t relevant to a modern, global world. And the lobbyists love this, because it isn’t going to happen so they benefit from the gridlock and inertia.
But I think history is on our side. And we have the ideas needed for this battle. So let’s fight.