13 Bankers

I'm now on page 135 (of 222) of this very clearly argued and compelling book by Simon Johnson and James Kwak. Best analysis I have seen so far. Seems that the repeal of Glass-Steagall was to allow Citigroup and Travelers to merge and to allow all the megabanks to get into the investment banking and insurance industries. I am coming slowly around to the conclusion that new regulations cannot work. At the least, they should not be about giving regulators more discretion. Regulators always end up getting captured by the industry. Thus, the solution is to break up the megabanks. They have too much economic and political power and have managed to bend the law to their advantage for too long.

Mike Konczai has a very nice reponse here to Paul Krugman. It is not either-or, regulations or break-up. Do both. But put a cap on size. At the risk of being blunt and boring, I see that as the message of Taleb's elephant story, too.

Johson and Kwak have argued that capital requirements will not work on their blog, and here is a more complicated version of the argument. Basically, megabanks can use accounting rules to hide their debt, which is what Lehman did with their repo 105 accounts. Which is what all the banks did with SIV's. There is a NY Times article today which argues that ultimately what we need is civil liability for such accounting lies.

The story of the move to deregulation is much more complicated than the progressive myth that it is all Reagan's fault. Carter supported it, too, and it worked for the airline industry. Deregulation movements began even earlier and arguments by economists began even earlier than that. John Cassidy captured some of the movement of ideas in his excellent How Markets Fail.

In spite of the fact that laissez faire was an ideology largely adopted by conservatives, which greased the wheels for financial deregulation, every solution that I seem to consider involving greater regulation seems futile, and thus pushes me to a more conservative position. More government won't work. What is needed is the Teddy Roosevelt solution. Megabanks have too much political power and must be broken up to preserve democracy. This also once again points to the fact that the ideology floating around in pop culture is mostly a distraction, as most "news" is noise. We cannot trust the politicians to fix it, nor the Supreme Court. We cannot trust the Fed, either. What is left?