A couple of days have passed since it became apparent what shape the financial regulation will take. There are still matters that need to be resolved in conference committee and the bill could get slightly stronger or weaker. We will continue to follow the progress. What Congress passes must then be implemented by regulators. It may face court challenges. Some provisions are subject to lengthy implementation periods. Even implementation is maximally effective, it is not adequate.
The financial system is as brittle today as it was yesterday, as this week’s market activity illustrates. Only with the passage of years can we expect the best parts of the regulation to have a material effect on the risk in the system. We must not rest our future on the adequacy of the bill and the regulatory implementation.
In addition to a fragile financial system, we have fractures in our economic structures . From Huffpo:
Perhaps the most troubling reality in the 21st Century is that our economics now dictates our cultural values, rather than the reverse, where We the People would decide how resources, production, and mutual prosperity should be systematized to achieve the best society for all. Like the cat’s claws, the corporation’s profit motive is its only tool for survival. The casino culture of the financial system has spawned an expectation for unrealistic year-to-year growth in investors of all forms, demanding that managers increase profits exponentially and unsustainably, lest they be canned and replaced. (ownership conundrum)
To account for that ever increasing demand — and constrained by laws that prohibit CEOs to take any action that isn’t in the direct fiduciary interest of shareholders — corporations are forced to externalize costs whenever possible, regardless of social or environmental detriment. This process takes many forms, such as shortcuts and cutting corners (British Petroleum), or outsourcing to more unsavory elements (sweat shops), to name just two.
Further, there are developing fractures in our social structure. The question is asked, “Are The Guillotines Being Sharpened?”
Historians will tell you there is often a time-lag between the onset of economic disaster and the accumulation of social fury. In act one, the shock of a crisis initially triggers fearful disorientation; the rush for political saviours; instinctive responses of self-protection, but not the organised mobilisation of outrage…
FinReg deals with issues that are on the surface. It does not deal with either the soul or shadow of money. The shadow has been exposed and it is ingrained in the nature of man as corrupted by the systems in which he operates. Unchecked greed is like a rock dropped in a pond. Its destructiveness ripples outward. The secondary or derivative effects are on others and the society as a whole. Fundamental human failings with high externalities must be contested at every turn. When a system magnifies rather than moderates human failings, periods of chaos can and will erupt. The article quoted from above references corporatism contributing to dysfunction, fraud, or looting as an enabler inadvertently facilitates addiction. The corporation, like an enabler, allows the sickly one to avoid accountability. Within the corporation, the fraudster, whether inside our outside the bounds of law, can avoid accountability for his actions. Last week I argued for a more aggressive effort around criminalization, not because I support that in general, but because absent any criminalization justice is not served and there is no deterrent for financial misdeeds.
Bill Black and Henry Liu contribute mightily to the shortcomings of a regulation only approach in these comments. From Black:
Compensation: Executive and professional — control frauds use these to (a) create the “Gresham’s dynamic” that allows them to suborn “controls”, officers and employees and turn them into fraud allies, and (b) to convert firm assets to their personal benefit while minimizing the risk of prosecution.
These internal frauds have been discussed at length in this blog previously. From Liu:
Based on information available so far, regulatory reform seems to have been ensnared by obscure technical details — the systemic consequence of which have not been fully established.
Resonating with my experience, Gillian Tett is quoted in this article as follows:
..bankers (like Tajik villagers) operate as a tightly defined group, with specific cultural patterns and a quasi language (or jargon) of their own. Also like Tajik villagers, bankers are generally trained to think in rigid “silos” and, as a result, find it hard to see how their overall system operates, or to see the contradictions in their own rhet oric and internal organizations.
To oversimplify, in banks there is groupthink and it is exacerbated by the silos in which bankers operate. These silos are more common the larger the organization. A side benefit of breaking up TBTF, which is rarely if ever mentioned in the technical arguments, is that smaller pieces of a legacy organization would necessarily have fewer silos, more transparency across business units and therefore more opportunity for individuals to see how their particular function and practices contribute to anti-social outcomes. You see, I believe that changing systems is a precondition to changing habituated organizational behavior which is acted out at the individual level. To say it another way, a great opportunity has been lost, not just to reduce systemic risk, but to humanize robotic financial corporations, to create individual accountability, and to promote a soulful understanding of money and finances.
It is up to each of us within our respective realms to seek to ameliorate these continuing challenges. How can we be powerful? Activism, truth telling, political engagement, demonstrations, confrontation, saying no, whistle blowing and encouraging prosecution. This fight is far from over. To avoid a more dangerous phase, the battle must be engaged in a deliberate, visible, and sustained way and there must be a sense of justice as well as reform.