In the aftermath, a loss of trust
What's up with the free marketeers in the Bush Administration rushing to help out the big firms on Wall Street? Commentator Robert Reich looks back at the last few years to find what started this mess.
Robert Reich (Marketplace)
More on The Economy, Wall Street, Commentaries, Commentary - Robert Reich, Robert Reich, Fed. Budget/Govt. Spending, America's Financial Crisis
TEXT OF COMMENTARY
Scott Jagow: Let's hear some thoughts from commentator Robert Reich on this mounting bailout bill.
Robert Reich: We haven't seen this much government intervention in the economy since Lyndon Johnson's Great Society. But this time it's Wall Street rather than the poor who's getting all the help.
Free markets, by definition, aren't supposed to need government support. Companies whose shares plummet are supposed to be ripe targets for takeover without government subsidies and guarantees. Firms that need capital are supposed to be able to raise it without emergency loans from the government.
So why are the free marketeers in the Bush Administration rushing to Wall Street's aid? The answer goes deeper than the subprime mess. The Street has suffered a serious decline in trust.
Yet trust is its most important asset. Financial markets trade in promises -- that assets have a certain value, that numbers on a balance sheet are accurate, that a loan carries a limited risk. If investors stop trusting those promises, Wall Street can't function.
But in the last few years, many Wall Street promises have not been worth the paper they're written on.
That's because, when the securities market was roaring, many financial players had no idea what they were buying or selling, and worse, they didn't care. Derivatives on derivatives; so-called special investment vehicles to move assets off balance sheets; credit default swaps; and of course securities backed by risky home loans. There seemed no limit to the financial smoke and mirrors.
That meant almost no limit to what was promised. And regulators looked the other way.
It worked great as long as everyone kept trusting and the market kept roaring. But all it took was a few broken promises for the whole system to break down.
What to do? Not to socialize capitalism, as is now being done. What's lacking isn't capital, it's trust. And the only way to rebuild trust is through regulations that require financial players to stand behind their promises and tell the truth, along with strict oversight to make sure they do.
We tell poor nations they have to make their financial markets transparent before capital will flow to them. Let's practice what we preach. Far better to regulate financial markets to keep them honest than to keep bailing them out.
Jagow: Robert Reich teaches public policy at the University of California, Berkeley.
Comments
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From N Chelmsford, MA, 12/10/2008
Cap markets are unstable. In the past there was no way to make them stable. But today we have computer power that can be used to make them stable. By using the greater computer power of today we can have a much higher turn over of cap in the cap market. This higher turnover will make the market harder to fix or control and the market will no longer have the unstable run ups or declines. Who can change or control the market when say 20% of the capital is trading each day. So now that we have the compute power to provide for all these transactions that will smooth out the market how to we force people to turn over at a rate of 20% a day? Easy, put a cap gains tax of 0% (zero) on all gains of 7 days or less and put a cap gains tax of 90% of all gains of 7 days or more. The likes of Yahoo Micosoft and/or Sun Micro Systems will give us the systems that will provide automated software agents to support turning over one's investments every 7 days (based on the specs you give the agent). A system like this will make the financial markets work as smoothly as the local fruit market.
From West Orange, NJ, 10/05/2008
Reich is more right than wrong. No amount of regulation can overcome bad motives and mistrust. Yet a completely unregulated market quickly competes its way down to one survivor.
The trick is to set up minimal governance that allows trust. As someone who writes about and teaches trusted relationships in business (albeit largely at a micro-level), there are three principles that serve the cause of trust.
One is transparency. Whether in individual interactions or in availability of accounting data, the more transparency, the less suspicion of motives and the less inclination to be non-trustworthy, and to distrust. In this last debacle, the industry developed more and more opaque products, and the regulators (SEC, Fannie, Freddie)--whether by sins of omission or commission--aided and abetted the opacity. Result: no one could put a value on anything meaningful--ergo no trust.
The second principle is relationships, not transactions. When a system is reduced to a set of one-off transactions, as opposed to an ongoing context of zero-sum negotiations, you don't create trust--you destroy it. This is because zero-sum interactions don't allow for the creation of obligations over time--no chance for etiquette, obligations or favors to accrue. Worse yet--many efficiencies are lost.
Finally there is commonality of interest. An unfortunate byproduct of the last few decades' focus on business process redesign is the loss of a shared interest in the outcome of a system, in favor of the outcome of a particular part of the process. The Invisible Hand just isn't a match for a greed-based game of musical chairs, which is what we saw in the last decade.
Trust is not served either by omnipotent regulators, nor by pure free markets. It's served by people of good intent carefully defining boundaries and rules for the successful working of markets.
From portland, OR, 10/01/2008
We have a regulated money supply which gaurantees we don't have a free market. A free market can only exist in a market with a fixed money supply related to a real value or an unlimited money related only to the economy, finding it's own value. We have had a regulated money supply directed specifically at enriching wall street. Combine that with unlimited deficit spending of the Bush administration and you have a recipe for the toxic stew that we are left with. The inflated monetary values never represented real values and they had to come crashing down. All other factors were contributing but secondary. Now that we have come back to reality, the same leaders that brought us this disaster would like to blow the giant inflatable plastic doll back up and resume business as usual.
From Yucaipa, CA, 09/18/2008
There is an army of risk adverse pit-bulls around us managing our money. Unfairly, win, lose, or draw they get paid. We need regulations designed to link their income to account performance, gains and losses. Time to let them buy their own lip stick.
From New York, NY, 09/17/2008
Mr. Reich makes much of the claim that this was an underregulated free market. He must not have noticed the 2 huge government backed gorillas in the room, Fannie and Freddie, and how they distorted the market.
In a truly free market everyone would know the players wouldn't be able to fall back on government backing or bailouts. Consequently, there would be much more due diligence by mortgage originators, home buyers and investors buying securities based on those mortgages. There wouldn't be such an explosion of easy money leading to a huge housing bubble followed by an inevitable crash.
Don't blame the problem on a so-called "free" market, Mr. Reich. Instead, start by blaming the US Congress, which set this mess in motion when it made decisions which distort and harm the housing market in a myriad of ways.
The solution is not to layer more mis-government on top of this mess. Instead, Congress needs to go back and undo the harmful market distorting measures that it already passed.
From New York, NY, 09/17/2008
Mr. Reich makes much of the claim that this was an underregulated free market. He must not have noticed the 2 huge government backed gorillas in the room, Fannie and Freddie, and how they distorted the market.
In a truly free market everyone would know the players wouldn't be able to fall back on government backing or bailouts. Consequently, there would be much more due diligence by mortgage originators, home buyers and investors buying securities based on those mortgages. There wouldn't be such an explosion of easy money leading to a huge housing bubble followed by an inevitable crash.
Don't blame the problem on a so-called "free" market, Mr. Reich. Instead, start by blaming the US Congress, which set this mess in motion when it made decisions which distort and harm the housing market in a myriad of ways.
The solution is not to layer more mis-government on top of this mess. Instead, Congress needs to go back and undo the harmful market distorting measures that it already passed.
From Providence, UT, 09/17/2008
Robert Reich's commentary is a failure - cheap and easy, like the FED and US Treasury printing money and bonds with abandon. That is the evil root of this problem he describes, but to which fails to follow-through.
Bear-Stearns, Lehman, Fannie/Freddie were not operating in a free-market. They were disastrous government infections and have been for years.
Regulation, oversight and transparency are words that socialists like Reich use to mask the real term: government destruction of healthy markets.
There is one Robert Reich and several ignorant lackeys "hacking at the branches of evil for every one hacking at its root." (H.D. Thoreau)
http://www.lewrockwell.com/paul/paul128.html
From Nashville, TN, 09/17/2008
Robert Reich's succinct analysis suggests that it is "socialism for the rich and capitalism for the poor".
Now the unspoken question in his commentary is: "What happens to Social Security and Medicare/Medicaid now that the federal government is submerged in debt?" Will McCain continue to insist on privatizing Social Security? Will Obama step out and say that Social Security and Medicare/Medicaid are part of the federal government and will remain that way? That would be an explicit challenge to McCain/Palin to stand up for the average guy not on Wall Street.
09/17/2008
Amen!!!!! That's all I have to say about Mr. Reich's commentary.
From Haymarket, VA, 09/17/2008
It seems that no matter how hard the current administration has tried to let markets operate freely, government intervention, at least in the financial sector, has become all-too-frequent and costly. Robert Reich is correct, regulation is needed to ensure the integrity of financial markets and re-build trust. But can we also trust that the regulators are doing their jobs? They owe the taxpayers that much, especially now that it is the taxpayers who are paying for this mess, one way or another.
From Bangalore, 09/17/2008
As a 3rd world country citizen , I agree fully with Robert, where is the transparency they talk so much about ? Financial industry it seems is still a black hole and are digging themselves into a blacker hole. Financial industry is still – a old boys club – and it seems CEO minds are not worried about losses and their larger consequences to public in western world (possibly because of golden handshake packages they manage to deal for themselves). Looks like the CEO's of most companies have not heard of quality of risk assessments and Importantly human factors affecting the risk assessments. (Mr Kenneth Lay and Enron lessons seems to have been forgotten already) Boys in Black tie ( and their computer wizard /geeks) should be taught about Assessments , indirect consequences and losses to community (state/country in general) on commitments they undertake , when risk assessments are made by them . They have a still lot to learn from Oil and gas / chemical industry in self regulations and risk management
From Philadelphia, PA, 09/17/2008
Q: 'How can we get more people, including political and financial leaders to hear him, and more important, to listen and act on what he has to say?'
A: Put him in Obama's cabinet. (sorry Berkley students)
From Roxbury, NY, 09/17/2008
I love Robert Reich! He always makes sense, and makes it so clear. How can we get more people, including political and financial leaders to hear him, and more important, to listen and act on what he has to say?!
From E Longmeadow, MA, 09/17/2008
Correction to earlier comment - "...in the long run without..."
Also, remember, these same bailed out institutions and individuals would be the main players in any privatized social security proposal.
From North Charleston, SC, 09/17/2008
I like Mr. Reich thinking and to add to it, it's not just American markets that need to be more transparent. From the looks of things many of the so called "Free World" markets need to be transparent.
From East Longmeadow, MA, 09/17/2008
Robert Reich is one of my favorite commentators. After listening to the cable TV talking heads for the last 18 hours spin around and around, Robert in a few short minutes clealy identified the problem and offered what I beleive to be the only solution, re-regulation. It is very clear that the financial markets cannot function in the long run with regulation.
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