Will It Work?

Interesting juxtaposition of things on Wall Street right now: the SEC is going after Goldman Sachs for fraud at exactly the same moment that Washington’s Democrats are pushing for financial reforms that might have curbed some of the behavior Goldman is in trouble for.

Some folks in DC think that there’s no coincidence involved — the Democratic administration has nudged the SEC into taking action at the same time it’s trying to muscle more regulation into the financial markets. Many Republicans, who feel the federal government is already way too involved in people’s lives, don’t want more regulation. But is this really the issue for a debate on the fundamentals of big government vs. little government? Of free markets vs. regulations? Is it time to be philosophical about government or time to be practical to make sure things work?

Back in the 1920s, you had what amounted to a regulation-free zone in the markets. That zone produced amazing amounts of wealth for a tiny portion of Americans and helped create the Great Depression. Under Franklin Roosevelt a number of regulations were imposed, and all these years later, the stock markets are doing pretty darn well, thank you. More than half of Americans own stock (either as equities or through mutual funds). I own a few shares myself, and I’m very grateful for the significant amount of transparency with which the markets operate.

Regulation did not stunt the growth of the stock markets, and it protected the investors, allowing more and more of them to participate in the markets. If you look at it philosophically, you have to admit that the regulations are a form of government intrusion in our lives. No two ways about it. But if you look at it from a practical standpoint, it’s hard to deny that it works. So . . . do you oppose regulation even if it works? Even when it protects the people whether they be citizens, taxpayers or investors?

Right now, the financial reforms that are being proposed would — hopefully, there are never guarantees with the federal government — tame the riskier types of consumer credit and force derivative trading into the open. The current proposal in the Senate calls for a consumer protection bureau, which will limit the riskiest of consumer credit such as “if you have a pulse, we’ll give you a mortgage” mortgages. Another provision of the Senate bill requires lenders to hold onto at least 5% of loans they issue, which might slow them up when it comes time to issue mortgages. If you can’t package and sell-off all of your turkeys, you might be a little more careful when it comes time to wield the “APPROVED” stamp on the loan papers.

Another reform proposal: Derivatives, such as credit default swaps, should be traded openly on the market, just like stocks and bonds. If open trading has allowed stocks and bonds to be bought and sold easily, and it has, what’s wrong with applying it to derivatives? Nothing. Okay, there is something: it might cut into the profits of the investment banks that sell them.

“Yeah, but,” my critics say (in my mind, my critics often suffer a lack of eloquence), “you’re going to intrude in people’s lives by creating all these new regulations. You’re going to create more government to enforce these new regulations. In the case of the consumer credit bureau, you’ll actually create new government entity that didn’t exist before. That’s the ultimate in more government. And we have too much government now.”

Yeah, but, I cleverly reply, it’ll probably work. And it seems to me that the bottom line of the arguments about the size and shape of government is: Does it work? If my rights aren’t being taken away by the government, isn’t it doing its job? If I’m able to invest freely and securely, isn’t that a good thing?

Thomas Jefferson is the patron saint of the folks who want less government. (Jefferson, who didn’t believe in God, is rolling over in his grave due to being referred to as a “saint.”) Jefferson was a wonderful writer and philosopher but a lousy administrator. Even his fans admit he was not the most successful of presidents — except for one thing: The Louisiana Purchase. The purchase was the single greatest piece of federal largesse in the brief history of the United States of America. And it was done by the man who hated federal largesse.

Jefferson was fully aware that the purchase went against almost everything he had written and said for decades. But when the opportunity beckoned, he pushed aside his principles like a forgotten prom date and went after it. He doubled the size of the country in a stroke, literally stretching the United States from sea to shining sea, and earning himself a place on Mt. Rushmore.

Why? Because it worked.

Jefferson couldn’t foresee all the benefits that would accrue to America thanks to the purchase, but he was sure they would be immense. And he was absolutely correct about that.

Right now, the reform debate seems to pose the question: Should we regulate the markets more closely at the expense of greater government intrusion in our lives?

I’d like to suggest an alternate form to the reform debate question: Will it work?

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