When is reform just another window-dressing?

By Bruce W. Morlan, 21 Jul 2010

I am a bit confused about the recent Wall Street reform bill, the so-called Dodd-Franks Bill, just passed and signed by the president.

This “2300+ page legislative monster” (Senator Richard Shelby of Alabama)  is yet another example of fat-cat politics being masked by a hard-sell publicity campaign that lies to the people by claiming to be protecting them (ha!). I cannot believe that a simple principled bill could not be written and championed by a principles-based party. I imagine that such a bill would have said something like:

  • To the bank that wants government underwriting of risk – FDIC-like coverage for your customers will cost $XYZ per thousand up to 250K per customer if and only if
    • your leverage is less than 2x (something to prevent overleveraging)
      (This reduces the probability of failure)
    • your total size is less than BBB (based on your publicly traded stock valuation)
      (This limits the taxpayer’s exposure)
    • your pay disparity from top to bottom is less than “some fair value”
      (the German model, I mean, you (the bank) have given up all pretense of being in the free market)
  • To the rest of you, free markets require that we allow success but also that we allow failure. Therefore:
    • grow big, but we will not allow public institutions, publicly backed pension funds, people paying less than $Ms in income taxes, etc. to invest in your instruments. If you fail, so do all your investors (to the extent that they have bet on you).
      (These are all secondary entities that most voters will not let the government leave to their fates)
    • don’t come whining to the taxpayers for bailouts because some third-world petty dictator is messing with your profit margins. That’s what you get for leaving our particular sandbox. Don’t expect us to send in the Marines to rescue you.
    • pay your taxes – don’t ask for earmarks disguised as tax breaks.

I presume that when the stories report that Dean Baker, co-director of the Center for Economic and Policy Research in Washington. says

“There is probably no economist who believes that this bill will end the risks of too-big-to- fail financial institutions. The six largest banks will still enjoy the enormous implicit subsidy that results from the expectation that the federal government will bail them out in the event of a crisis.”

they are correct that taxpayers are still on the hook for some of these institutions that want to play as “big players in the free market for profits, but protected entities in the special interest markets if they fail”.

If we are truly for free markets, we need understand that the algorithm (natural selection) that continuously invents better mice also, through the same mechanism, improves our markets. The important mechanism is not just that success is rewarded, but also that failure is not rewarded. It is this process that gives us modern inventions to replace older less efficient technologies, it gives us cars instead of horses, and it gives us surgery instead of voodoo. Embrace both success and failure in the name of freedom, or disregard both in a pollyannish and euphorian belief that wishing and hoping are equivalent to work and study.

Bruce W. Morlan is a mathematician and statistician who has taught operations research, a backgound that included investigating and  teaching the genetic algorithm, game theory and deterrence, economics, and other decision analytic algorithms.  He is also a commentator on social issues and host of Politics and a Pint. He is a frequent contributor to our site.

Talking Politics with Tom Emmer – 21 July 2010

Join Republican candidates for a fabulous dinner and learn about their vision for Minnesota

WHEN: Wednesday, July 21st 5-8PM
WHERE: Park Ballroom, New Prague

  • 5:00 pm – 6:00 pm - Social Hour – Meet all the area legislative candidates
  • 6:00 pm – 6:30 pm – Tom Emmer will address an Agricultural Forum with area farmers. All are invited to listen!
  • 6:15 pm – 7:00 pm – Dinner for all guests – a fabulous Park Ballroom dinner
  • 7:00 pm – 8:00 pm - Tom Emmer will address guests and answer questions as time permits

Our Candidates:

  • Tom Emmer, Governor
  • Al DeKruif, State Senate 25
  • Glenn Gruenhagen, State House 25A
  • Kelby Woodard, State House 25B

Tickets: $40 per person. Includes dinner and supports our Republican candidates.

Reservations can be made by mailing checks to: Rice County Republicans, PO Box 22, Dundas, MN 55019

Directions to Park Ballroom (Google maps): 300 Lexington Ave S. New Prague (952)-758-4603. One block south of Main Street/CR 19 on Lexington Ave. S.

Questions or further information:

  • Rod Tietz, rodtietz@gmail.com
  • Doug Jones, doug1mary@gmail.com 507-663-6191

Event Sponsors:

  • Rice County BPOU – Kathy Dodds, Chair
  • LeSeuer County BPOU – Janet Morris, Chair

Prepared and paid for by Rice-Scott Co BPOU and
not authorized by any candidate or candidate’s committee.
PO Box 22, Dundas, MN 55019

Earth Day …just another touchy-feely day?

Today is Earth Day … one of those proclaimed days designed to educate us by giving us an excuse to be introspective and examining. Of course, lots of people see this as an opportunity to lay on a thick layer of guilt and to engage in a series of mea culpa self flagellations that may end up laying the whip on everyone but themselves, but that’s the nature of the fanatic.

But some of the issues that go with Earth Day include attempts to deal with the tragedy of the commons, which says that any resource owned by everyone (e.g., air, and, in Minnesota and most of the west, ground water) is destined to be overconsumed or despoiled because if everyone owns it, then effectively no one protects it and we all gain the most by simply consuming it to our own ends. The Cato Institute summed it up nicely:

Any resource held in common – whether land, air, the upper atmosphere and outer space, the oceans, lakes, streams, outdoor recreational resources, fisheries, wildlife, or game – can be used simultaneously by more than one individual or group for more than one purpose with many of the multiple uses conflicting. No one has exclusive rights to the resource, nor can any one prevent others from using it for either the same or any noncompatible use. By its very nature a common property resource is owned by everyone and owned by no one. Since everyone uses it there is overuse, waste, and extinction. No one has an incentive to maintain or preserve it. The only way any of the users can capture any value, economic or otherwise, is to exploit the resource as rapidly as possible before someone else does.

Their article suggests that the solution is to permit and encourage private ownership of what we would normally think of as public assets. Their examples focus on wild animals as exemplars. They contrast the prairie chicken (American, held in “common” as a wild animal) with the red grouse (Britian, owned by the landowners where it lives). The contrast is clear, the value of private ownership lies in the incentives to protect the resource, the red grouse is doing much better than the prairie chicken.

But some resources are very difficult to control. Clean air and clean water are two that we might consider to be un-ownable. If you have read “The Moon is a Harsh Mistress” by Robert Heinlein, you have had a unique opportunity to learn the free market lessons that more recent movies like Avatar have missed, and that is that there is no such thing as a free lunch, and clean air is no more free than is clean water. But that was in a closed environment. Earth Day, in some sense, is an attempt to remind us that the Earth, too, is a closed system if you look at it realistically. If these resources (air, water) cannot be conserved by market forces, then we may find ourselves having to conserve them by fiat.

So, in spite of our own cries of “foul play” and “big government”, we should think carefully before we simply rule out the use of EPAs and MPCAs to help us deal with these particular tragedies of the commons. Demagogues may decry these institutions as just examples of big government to bring out the vote, but we know that the complexities of modern life suggest otherwise. Although some call for their elimination,  cautious conservatives know that when you have tread onto thin ice you may not want to jump up and down until you have carefully negotiated yourself back onto firmer foundations.