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Wall Street Reform and Beyond
By Kaufmann | April 16, 2010 No Comments »
For years I have been arguing that regulatory and state capture is a major challenge in many countries, including in the US. I wrote papers, presented analysis and evidence, even argued the case to top executives at the World Economic Forum long ago. Yet I had limited success, other than getting some articles published in journals and a sprinkle of accolades from a few development specialists. The skepticism tended to be exponentially higher in rich industrialized countries than in developing and post-transition countries.
That started to change a bit at the outset of the financial crisis…
Still, the few of us who were writing about corruption and capture in Wall Street, and the perverse role played by money in politics, were vastly outnumbered by those providing technocratic explanations of the crisis — whether misunderstanding of risk, low interest rates, leverage ratios, or macro-economic imbalances. Few were asking probing questions as to the extent to which such technocratic factors were driven by politics, including various forms of capture. In the interim, more has been written about this, yet skepticism remains regarding non-technocratic explanations.
Today an unorthodox blog entry in the Baltimore City Paper mentions the previous work on capture (identifying me as ‘the Brookings guy’…), suggesting that it does apply not just to the Wall Street (or US generally), but also to Baltimore. In his ‘Crash Course’ blog, The blogger, Edward Ericson Jr. aims at writing (by his own admission) ‘annoyingly didactic musings on the financial meltdown’.
In his blog entry today he picked up on the whole issue of corruption because he saw the lead Wall Street Journal (WSJ) story today on the link between corruption and macro-economic stability, which focused on Greece. That WSJ piece discusses my ongoing research which suggests that among industrialized countries, those with higher levels of (legal and illegal) corruption are likely to exhibit a much higher fiscal deficit than those with very low levels of corruption, the difference in their budgetary balance being in the order of 7-to-8 percentage points of GDP. In the coming days I will be having more detailed entries on this.
For now I wanted to emphasize instead on an aspect that the City Paper ‘Crash Course’ article focuses on, namely the claim I make that an obsession with ordinary measures of corruption (e.g. coarse forms of bribery) has been counterproductive, hiding the true extent of corruption in many industrialized countries (including the US, Greece and others). Such corruption in rich countries may take subtler forms than in Equatorial Guinea (and not always strictly illegal), but nonetheless they are enormously costly for society and the world’s welfare, as witnessed in the aftermath of the Wall Street debacle.
Which leads to the last, and most important, reason to write about this today: Obama going all out to push for Wall Street Reform. Many of us (millions, in fact) received his letter on this issue today in our email inbox. I reproduce it in full below for those who did not receive it and are interested. The battle lines are already drawn, as they were during the health care reform debate, between those vested interests that oppose regulating the banks, versus those that see some modicum of reform as essential for future financial stability and protecting the vulnerable.
Coincidentally, today the Securities and Exchange Commission (SEC) accused Goldman Sachs of mortgage-related securities fraud in the lead up to the financial crisis. This stunning development (with an SEC daring to sue Goldman!) is now to weigh heavily on the financial reform debate.
Let us mince no words: the proposed reform package is far from ideal, even if vastly superior to ‘business as usual’ inaction. A major missing pillar of the financial reform package refers to regulating money in politics, including campaign finance, which nowadays still abets capture. The US Supreme Court took a step backwards in their 5-4 split decision in late January in the Case of Citizens United v. Federal Election Commission, which further enable corporations to exert undue influence on the state and its policies, laws and regulations through political funding. These issues will have to be revisited at some point in the future if the US is to make inroads on its own quality of governance and regain world class status.
But for now, adopting the proposed package of Wall Street reforms would constitute an auspicious start.
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President Obama letter received today, April 16, 2010:
Daniel –
It has now been well over a year since the near collapse of our entire financial system that cost the nation more than 8 million jobs. To this day, hard-working families struggle to make ends meet.
We’ve made strides — businesses are starting to hire, Americans are finding jobs, and neighbors who had given up looking are returning to the job market with new hope. But the flaws in our financial system that led to this crisis remain unresolved.
Wall Street titans still recklessly speculate with borrowed money. Big banks and credit card companies stack the deck to earn millions while far too many middle-class families, who have done everything right, can barely pay their bills or save for a better future.
We cannot delay action any longer. It is time to hold the big banks accountable to the people they serve, establish the strongest consumer protections in our nation’s history — and ensure that taxpayers will never again be forced to bail out big banks because they are “too big to fail.”
That is what Wall Street reform will achieve, why I am so committed to making it happen, and why I’m asking for your help today.
Please stand with me to show your support for Wall Street reform.
We know that without enforceable, commonsense rules to check abuse and protect families, markets are not truly free. Wall Street reform will foster a strong and vibrant financial sector so that businesses can get loans; families can afford mortgages; entrepreneurs can find the capital to start a new company, sell a new product, or offer a new service.
Consumer financial protections are currently spread across seven different government agencies. Wall Street reform will create one single Consumer Financial Protection Agency — tasked with preventing predatory practices and making sure you get the clear information, not fine print, needed to avoid ballooning mortgage payments or credit card rate hikes.
Reform will provide crucial new oversight, give shareholders a say on salaries and bonuses, and create new tools to break up failing financial firms so that taxpayers aren’t forced into another unfair bailout. And reform will keep our economy secure by ensuring that no single firm can bring down the whole financial system.
With so much at stake, it is not surprising that allies of the big banks and Wall Street lenders have already launched a multi-million-dollar ad campaign to fight these changes. Arm-twisting lobbyists are already storming Capitol Hill, seeking to undermine the strong bipartisan foundation of reform with loopholes and exemptions for the most egregious abusers of consumers.
I won’t accept anything short of the full protection that our citizens deserve and our economy needs. It’s a fight worth having, and it is a fight we can win — if we stand up and speak out together.
So I’m asking you to join me, starting today, by adding your name as a strong supporter of Wall Street reform:
http://my.barackobama.com/StandForWallStreetReform
Thank you,
President Barack Obama
Topics: capture, Corruption, financial crisis, G-20, Measurement Frontiers, Public Financial Management, Public-Private Linkages, Regulation & Security, Rule of Law | | Read and Submit Comments