Financial Regulations Don't Work
By Staff News & Analysis - July 16, 2010

Why financial reform might not work as intended … The Senate passed financial reform Thursday, and President Obama (left) will sign it, but many of the tough decisions will be made by federal regulators. How they interpret the bill will be key … Even before the Senate passed sweeping finance reform Thursday, House Republicans – now within range of taking back the majority in fall midterm elections – called for its repeal. It's the latest sign of how election-year politics dominated the debate over financial regulation – and how tough it could be to sustain reform over the years it will take for all elements of the law to take effect. "Because of this reform, the American people will never again be asked to foot the bill for Wall Street's mistakes. There will be no more taxpayer-funded bailouts, period," said President Obama in remarks at the White House after the Senate vote. Commenting on House GOP threats to repeal the bill, he added: "I would suggest that American can't afford to go backwards. And I think that's how most Americans feel as well. We can't afford another financial crisis just as we're digging out from the last one." – CS Monitor

Dominant Social Theme: This is not the right way to regulate – but eventually we will get it right.

Free-Market Analysis: Toward the bottom of this article, we will try to provide a broad and extremely simplified overview of the upcoming financial regulation package that will at some point be signed by President Barack Obama. Of course, since the final bill is over 2,300 pages and encompass some 200-plus distinctly different regulatory exercises, we don't quite see how anybody can anticipate the outcome. We will not be alone in trying.

The larger conversation encompasses a forthright and basic dominant social theme: "Capitalism is prone to error, and government corrects." How in the 21st century anyone can still subscribe to this formula, having seen the damage that government has wrought on myriad fronts, is beyond us. But nonetheless, the politicians march forward in America and elsewhere, empowered by their role as the people's representatives and shielded from any major scrutiny by major Western media the world over. Here's some more from the article:

Wall Street reform is broadly popular with American voters. But Republican leaders oppose it as a potential job killer. At the 11th hour, Republican Sens. Susan Collins and Olympia Snowe of Maine and Scott Brown of Massachusetts came to terms with Democrats over "fixes" to the bill, allowing Democrats to break a GOP filibuster today. "This bill would not have happened without them," said Senator Reid, after the vote. But the 2,300 page overhaul also requires drafting some 200 regulations, as well as studies and extended timelines before many features of the law take effect. The fight to ensure that the intent of Congress is reflected in regulations could be as protracted as the two-year battle to pass reform …

The lobbying for the future of financial reform doesn't end when Mr. Obama signs the law. In fact, it could be just beginning, as regulators and congressional overseers get down to the business of writing the high-stakes rules … "By delegating so much to the regulators, Congress is inviting everyone interested in the outcome to make more campaign contributions, as they intervene in the regulatory process to influence the regulators," says Thomas Ferguson, a professor of political science at the University of Massachusetts, Boston. "Nothing is settled. It's a gold mine for members of Congress."

We can see the vast scope of this bill from the excerpt above, but also the difficulties with implementing what Congress will eventually pass and the President will sign. But what is more questionable still is the exercise itself. Congress (and Western regulatory authorities generally) must have passed or at least allowed enactment of hundreds of thousands of financial rules and regulations over the past 100 years. Yet today the Western economic system is seemingly worse off than ever, with whole nation-states threatened with bankruptcy while the banking sector itself – the target of many of these regulations – has been faced generally with a kind of ruin.

According to much of the mainstream American media, Wall Street regulations are to be generally well received by the public; yet one of the architects of financial "reform", Connecticut Senator Chris Dodd is about to lose his Senatorial seat in Connecticut. According to a recent Reuters article ("Wounded Sen. Dodd Guided Wall St Reform to Victory"), "The Senate's approval of the Dodd-Frank bill, also named for Dodd's co-author, Democratic Representative Barney Frank, will be a book-end to Dodd's long legislative career. … But as far-reaching as the bill is … legislation it had little impact on voters' recent negative view of Dodd, said Doug Schwartz, director of Quinnipiac University's political polling unit in Connecticut."

And Schwartz adds, "I just don't think people are aware of … Dodd's role in shaping legislation. They know about President Obama and what he's trying to do, but I don't think they're really aware of who the Senate and House players are."

The Reuters article goes on to speculate that Dodd will be honored for his role in various sorts of land-market bills, but we are not so sure. We think the disenchantment with Dodd is part of a larger anti-incumbent wave sweeping the US. Unlike past waves, we think that this one will not merely crest and subside. We think wavelets will continue and perhaps even culminate in a larger tidal wave that will in some sense change the system permanently.

We see signs of elite concern everywhere. Central bankers struggle to reflate Western economies and generally to get things running again, seemingly without much success. All this is convered in painful detail on the Internet. Meanwhile, there are increasingly aggressive attempts to regulate and censor the 'Net, which has done a great deal to enlighten people about how the system really works. These efforts are themselves proof-positive that the Internet has had an impact.

The trouble with "regulating" the Internet is that the damage has already been done and many are aware of the Internet as a liberating force in their lives. Thus any attacks on the Internet only reinforce a perception of government double-dealing and corruption. This is why dominant social themes are so important to the power elite. These fear-based promotions, if effective, prompt people to VOLUNTARILY give up wealth and power. But when pre-emptive legislation is passed without proper groundwork, it merely looks like a power grab. And this is where the elite and its regulatory structure are now. The process is too obvious and will likely reinforce negative trends rather than ameliorating the problem.

This regulatory problem extends to the financial reform bill as well. The trillions that the elite has lavished on too-big-to-fail firms are going to have a slow-motion effect on the credibility of the entire system. Because the bailout occurred in the Internet era, it was carried out in a "live" fashion and the issue of money creation (money from nothing) became perfectly clear to average Westerners, especially Americans. Previously it may have been thought that only one man in a million might understand the questionable practice of printing fiat money, but now a lot more do. And many may have wondered why counterfeiting itself is illegal when a small, powerful group of men do it without oversight on a regular basis.

Cynicism is a growing feature of modern-day, Western life. And the financial reform bill soon to be signed will do nothing help abate this trend. We promised a brief overview and we will provide one here as quickly and succinctly as possible. First, a recent summary from Reuters ("Wall Street Reform Clears Congress") as to what the bill contains: "Wall Street had fought bitterly to derail the legislation, which leaves few corners of the financial industry untouched. It establishes new consumer protections, gives regulators greater power to dismantle troubled firms, and limits a range of risky trading activities in a way that would curb bank profits."

Our summary as briefly and brutally as possible: The regulation will not do anything positive. It is 2300 pages of minutiae that basically rearranges the deck chairs on the Titanic. If it does do something, it will likely be along negative lines. That's because it gives the US government blunt empowering language to shut down too-big-to-fail financial firms. You can bet over time that most too-big-too-fail firms will be protected one way or another and the legislation will be aimed at shutting down smaller, feisty competitors that pose a threat to vested interests.

Western economies blow up over and over again because power-elite-installed mercantilist central banks print too much money causing first booms and then busts. There is no regulatory authority on earth that can control this process unless it seeks to do away with central banking itself and attempts to return society to honest money and honest private banking.

After Thoughts

Financial regulation, especially, is something of a fraud. Over and over, industry participants are further regulated whenever the system blows up while those who have provided the tools, the means and the methods either avoid censure or are actually empowered. In today's Internet era, we wonder how much longer such a situation can continue without considerable push-back.