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Playing by the Rules, Whatever They Might Be

Ever since the Bear Stearns bailout, the Fed’s opening of its discount window to investment banks, and the rethinking of Alan Greenspan’s legacy, there’s been a clamor for more regulation of the financial markets. That clamor grew a bit louder recently after comments by Austan Goolsbee, one of Democratic presumptive nominee Barack Obama’s economic advisors. Goolsbee said that an Obama presidency would ensure that investment banks are as closely regulated as commercial banks.

Both Megan McArdle and the folks at The Corner are raising some questions about this, and for good reason. Specifically, what kind of regulations are we talking about? Goolsbee didn’t go into details, and not a lot of other folks have, either, McArdle notes.

Over the past few months, I have been to a dozen or more events sponsored by various think tanks that together represent most of the American ideological spectrum. Most of them think that investment banks need “more regulation”; it’s a pretty strong consensus. The problem is, there are precious few ideas as to what that regulation might entail.

It’s one thing to harbor some legitimate concerns about what regulations might be coming down the pike. It’s another thing entirely to ask, as McArdle and others then go on to do,

Greenspan is basically saying we shouldn’t regulate banks because it’s hard to be smart enough about their business. That’s a pathetic excuse.

Well, yes it is. Here’s a good time to note that those same brilliant banks and financial institutions have been reduced to playing a trash for cash game, in which they swap mortgage-backed securities they can’t sell for cash or Treasury bonds from the Fed. It doesn’t leave them much room to argue they’re too smart for rules.

Just like investment banks, the financial services industry as a whole gets itself in trouble not because it’s too complex for regulators to understand but because it does everything to excess, pushing the limits until it gets caught. Consider two recent examples. Here’s Business Week, describing how banks and credit card issuers such as Citigroup and JPMorgan Chase are among the many corporations that force consumers into arbitration to settle disputes – it’s usually outlined in the fine print on your statement, right where you’re sure to read it – then hire the very same arbitration firms to settle the disputes. And here’s a Chicago Tribune look at how third-party debt collectors clog the court system, filing in volume to gain profits, filling the dockets with suits marred by mistakes such as settled debts and wrong identities. Their efforts grew in earnest after lawyers for creditors such as banks and credit card firms pushed to change Illinois law to stop judges from limiting how much collection agencies could garnish from wages.

My best guess is that even a low-paid, government-employed regulator can figure out when something stinks. And financial institutions that do these sorts of things make it pretty easy for them. So if investment banks don’t want a bunch of new rules imposed on them, maybe the best way to avoid that would be to stay in line, quit profiting from trash and then dumping it on the Fed, and stop insulting the intelligence of the rest of us, who not only clearly see what they’re up to, but end up paying for it.

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