A fine mad­ness in the air

The Washington Times Weekly - - Commentary - Tony Blank­ley

To bor­row Niall Fer­gu­son’s metaphor, if fi­nance is an evo­lu­tion­ary process, then reg­u­la­tion is its in­tel­li­gent de­sign — which, I would add, is a cog­nate of faith, not sci­ence.

Or, to take the ob­ser­va­tion of for­mer Fed­eral Re­serve Gov­er­nor Fred­eric Mishkin, if “the fi­nan­cial sys­tem (is) the brain of the econ­omy,” then, I would sug­gest, heavy reg­u­la­tion is its lo­bot­omy; while it re­moves the emo­tional highs and lows, it also dulls the per­cep­tion, fa­cil­ity and adroit­ness. (Dis­clo­sure: In keep­ing with my long-held pub­lic view, I give pro­fes­sional ad­vice to fi­nan­cial in­sti­tu­tions seek­ing low reg­u­la­tion and tax­a­tion.)

A cen­tury ago, med­i­cal sci­ence had faith in lobotomies. To­day, it seems, Wash­ing­ton po­lit­i­cal sci­ence has faith in new fi­nan­cial reg­u­la­tion.

Med­i­cal sci­ence be­gan to gain wis­dom when it learned what pre­vi­ously un­re­al­ized dam­age it caused when it lobotomized hu­man brains. We must hope that the “ex­perts” to­day who are draft­ing new reg­u­la­tions by which they would im­pair our fi­nan­cial sys­tem gain wis­dom soon by rec­og­niz­ing how lit­tle they un­der­stand the ef­fects of th­ese new reg­u­la­tions on our econ­omy’s fu­ture health.

How­ever, the cur­rent fi­nan­cial reg­u­la­tory ef­forts in Wash­ing­ton may not even de­serve the honor of be­ing com­pared to in­tel­li­gent de­sign or a lo­bot­omy. At least with those two pro­cesses, each has the in­tel­lec­tual dig­nity of an in­ter­nal logic — even if that logic does not ac­cu­rately de­scribe the re­al­ity it at­tempts to ex­plain and ma­nip­u­late.

Rather, the cur­rent likely fi­nan­cial reg­u­la­tory ef­forts have an al­most ran­dom na­ture to them, as the leg­isla­tive logrolling is col­lect­ing un­re­lated and some­times-in­con­sis­tent ideas that even­tu­ally will be called, I as­sume, the Frank/Dodd Com­pre­hen­sive and Ra­tio­nal­ized Na­tional Fi­nan­cial Re­demp­tion Act of 2009.

The fi­nal bill will be the com­pi­la­tion of the re­sults of var­i­ous po­lit­i­cal bat­tles be­ing fought among the pres­i­dent, his vari- ous White House eco­nomic and po­lit­i­cal ad­vis­ers, the Trea­sury and var­i­ous pow­er­ful com­mit­tee and sub­com­mit­tee chair­men in the House ver­sus their equiv­a­lents in the Se­nate, as well as the suc­cess­ful in­ter­ven­tions of var­i­ous in­ter­ests, the in­sti­tu­tional par­tial vic­to­ries that are gained in the bat­tles among the half-dozen or so over­lap­ping fi­nan­cial reg­u­la­tory agen­cies in ex­is­tence, plus what­ever the whim­si­cal ef­fects are of the back­benchers, the states, the com­men­ta­tors, the me­dia and, of course, the pub­lic.

Even if 10 of the smartest fi­nan­cial reg­u­la­tion ex­perts in the world got in a room and wrote an in­ter­nally con­sis­tent set of reg­u­la­tions, if his­tory is any guide, it would not be likely to an­tic­i­pate, avoid or mit­i­gate what­ever the next fi­nan­cial cri­sis would be. As Fer­gu­son wrote in “The As­cent of Money,” “It seems that, for all our in­ge­nu­ity, we are doomed to be ‘fooled by ran­dom­ness’ and sur­prised by ‘black swans.’” (See — and read — two of Nas­sim Ni­cholas Taleb’s in­trigu­ing books, “Fooled by Ran­dom­ness: The Hid­den Role of Chance in Life and in the Mar­kets” and “The Black Swan: The Im­pact of the Highly Im­prob­a­ble.”)

Ac­cord­ing to a study of fi­nan­cial data of the past two cen­turies, there is a 3.6 per­cent per an­num prob­a­bil­ity of a fi­nan­cial dis­as­ter and, sta­tis­ti­cally, a 100 per­cent prob­a­bil­ity of a new fi­nan­cial dis­as­ter within 33 years.

Trea­sury Sec­re­tary Ti­mothy Gei­th­ner — who is the lead ex­ec­u­tive-branch fig­ure de­sign­ing new reg­u­la­tions to pro­tect us from the kind of sys­temic risk of fail­ures by large in­sti­tu­tions that we have just ex­pe­ri­enced and are try­ing to work our way through — in­ad­ver­tently cap­tured per­fectly the mad­ness of the cur­rent Wash­ing­ton mo­ment.

Mr. Gei­th­ner was quoted in the Fi­nan­cial Times on June 10: “I think this has been a sear­ing ex­pe­ri­ence for fi­nan­cial in­sti­tu­tions across the world. The great risk we’re go­ing to live with for a very long time is that risk aver­sion re­mains very high.”

I hap­pen to agree with him and made a sim­i­lar ob­ser­va­tion in a col­umn last month. But I won­der when it will dawn on the sec­re­tary that he is lead­ing the team de­sign­ing a reg­u­la­tory sys­tem to pro­tect us from “greedy” and im­pe­tus-ex­ces­sive fi­nan­cial risk tak­ers de­stroy­ing the world econ­omy, when, as he him­self pointed out, the real next risk is prob­a­bly “risk-averse” bankers fail­ing to make even suf­fi­cient pru­dent loans and in­vest­ments.

In other words, he is de­sign­ing reg­u­la­tions that will force more pru­dence and even slower and less cir­cu­la­tion of needed money on a sys­tem that he be­lieves is al­ready pre­dis­posed to be too pru­dent and too slow and will cir­cu­late too lit­tle money to keep our econ­omy hum­ming.

Re­al­ists like to point out that most gen­er­als think they are fight­ing the last war and thus lose the one they are in. So to­day, Wash­ing­ton is busy pre­par­ing to pro­tect our fu­ture econ­omy — which is likely to be stagnant, risk-averse and weighted down with ex­ces­sive debt, high taxes, ex­pen­sive en­ergy and in­dus­trial pol­icy crony cap­i­tal­ism in­ef­fi­cien­cies — from yes­ter­day’s fi­nan­cial im­petu­os­ity and ex­ces­sive risk tak­ing. Thereby, we will in­crease the stag­na­tion, risk aver­sion and mid­dle-class poverty such habits will cause. Wash­ing­ton isn’t writ­ing a fi­nan­cial reg­u­la­tion; it is weav­ing an eco­nomic shroud.

Tony Blank­ley is ex­ec­u­tive vice pres­i­dent of Edel­man pub­lic re­la­tions in Wash­ing­ton.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.