The Next Big Political Issue

Health care reform is pretty much done for the moment. There is a lot more to do, but it will have to wait for another time. We have other important issues to which we need to pay attention.

New regulations in the financial industry is the big current issue. The workings of that industry nearly led to a depression and have cost we taxpayers a lot of money. Many people have lost their jobs because the recession is much worse than it needed to be. And we know how Wall Street has come out of this.

From what I hear, Obama is not going far enough. Here is a good article with links to other articles on the issues.

And Robert Solow's review of John Cassidy's book, which I reviewed some time ago, makes some very good points. Here is one:

"Take an extreme example. I have read that a firm such as Goldman Sachs has made very large profits from having devised ways to spot and carry out favorable transactions minutes or even seconds before the next most clever competitor can make a move. Deep pockets in a large market can make a lot of money out of tiny advantages. (Of course, if you have any such advantage the temptation is irresistible to borrow a lot of money to enlarge your bets and your profits. Leverage is good for you, until it isn’t. It is not so good for the system.) A lot of high-class intellectual effort naturally goes into trying to invent ways to find those tiny advantages a few seconds before anyone else.

Now ask yourself: can it make any serious difference to the real economy whether one of those profitable anomalies is discovered now or a half-minute from now? It can be enormously profitable to the financial services industry, but that may represent just a transfer of wealth from one person or group to another. It remains hard to believe that it all adds anything much to the efficiency with which the real economy generates and improves our standard of living.

If that suspicion is valid--I emphasize that the necessary calculations have not been made and will be hard to make--the conclusion would be that our poorly regulated financial system is not only dangerously unstable, but also too big and too complex, absorbing talent and resources that could be better used doing something else. What is inadmissible is the assumption that, if the market creates a large and convoluted financial system, the market must be right. John Cassidy’s book should confer on a thoughtful reader a lasting immunity to erroneous free-market sloganeering, whether simpleminded or devious, while still conveying some feeling for what a well-functioning market system can actually do. Both ideas are important."

As Mark Thoma remarks, this circumstance makes a transactions tax look much better. At least it is time we started thinking about this issue. Excess leverage, poor regulation of lending practices, the massive derivatives market, lack of transparency, and many other factors combined to produce this mess. Are we going to go there again?