Pelosi, Tea Parties and Financial Reform

I am sure that most of my readers have seen the HotAir column linking to the video where Pelosi alternately trashes the Tea Partiers as "astroturfing Republican hijackers" and then claims to have something in common with them:

But, you know, we share some of the views of the Tea Partiers in terms of the role of special interest in Washington, D.C., as — it just has to stop.

So Democrats are somehow above taking money and cutting deals with special interests? This is her claim? My rebuttal, Take Geithner . . . please! He is but one of many Democrats with ties to special interests that are in positions of authority with regards to financial regulation.

At least 25 senior Obama administration officials previously held executive or board-of-director posts with some of the globe’s biggest financial houses, according to a new analysis for Portfolio.com by the Center for Responsive Politics (CRP), a campaign-finance watchdog group. (To see a full list of the officials with previous jobs on Wall Street, click here.)

Now the Bush administration was not better, and neither were any previous administrations. I'm not sure that you can adequately populate government staff without individuals knowledgeable about the industry. However, this often leads to a condition known as regulatory capture, where the regulators appear to be regulating for the benefit of the industry, not the general public. To some extent this process is inevitable, see Public Choice theory. Now this doesn't excuse Pelosi for her continued mendacity and slander against our movement, but it points out the complexity of the situation.

So how can we bring about financial reform? Much of what we are protesting in the Tea Party is the close ties between Big Business, especially Wall Street and Big Government the end result of which is taxpayer bailouts of risky behavior. The end result is the exact opposite of justice, the stockholders and the taxpayers get screwed and the bankers get bonuses. We don't begrudge the bonuses, we just don't think we should pay for them through the bailouts.

I am still working out a Tea Party position on bailouts that is cogent and deals with this complexity in a simple way. Here are some things to think about. First, we should demand that politicians allow at least some big banks to fail. The bankers have called the government's bluff and keep raking in the chips. Second, we should say, ok, if you're going to be too big to fail, fine, you're going to have to keep increasing your reserves so that you don't fail. (No time to fully flesh this out today, but I think reserve requirements should scale up once a firm reaches a significant market share. This will act as a brake on unbridled growth by one institution as well.)

Third, we should demand transparency for all financial assets. In October 2008, I had a chance to talk to some municipal bond traders. We were arguing about the need for a bailout, me contra, as you might expect. Since we got dug in our positions; I asked a different question, because even then it was obvious that the mortgage backed security free-fall was the real killer, roiling the markets. I asked if there had been transparency and good information about the underlying value of the assets backing the securities, would this problem have occurred. They agreed that it would not have because market forces would have come into play earlier, so their would have been more time for big firms to adjust.

In summary, we should demand an end to "too big to fail." We should demand transparency in the way that assets are priced. Finally, we should demand that banks can't take risks when their risks are subsidized, such as through deposit insurance. I welcome the comments of those more knowledgeable in this field than I.