Simon Johnson: Restoring the Rule of Law in Financial Markets

“Crime, once exposed, has no refuge but in audacity.”

Tacitus

With campaign finance reform, the need to reform the financial markets is one of the greatest social policy issues of our time.

Simon Johnson is one of the few 'name' economists who recognizes this and is willing to talk about it.

There is a bitter campaign being waged in the think tanks and the media against reform. The campaign is similar to that which was waged for almost a decade to overturn Glass-Steagall.

Getting rid of bad government by eliminating all government is just giving the real perpetrators what they wish. What we need are the kind of rules and regulation that Simon Johnson and Elizabeth Warren talk about here.

It is the kind of reform that Franklin Roosevelt worked to put into place that lasted for almost 70 years, until the forces of Wall Street were able to guile the people into handing over their pursestrings to them once again.

What is discouraging is the deep involvement of both sides of the aisle in the Congress in enabling this sad corruption of the markets and the financial system--  for money.   And in particular how the moral and intellectual processes of the state have become corrupted by the power of the moneyed interests.

To put a fine point on it, once the professional classes become cowed or corrupt, reform of the process through systemic means is exceptionally difficult.   What we have is deep capture and the credibility trap reinforcing the worst of the abuses through a series of punishments and rewards.

And what may be particularly galling is when insiders who are at the locus of the corruption, like our recent crop of presidential candidates on both sides, talk about how they will change things, while the money is still flowing through their hands, and the spin is flowing out of their mouths.

And alas, even some of the reformers seem more interested in getting some of their own power and money than in promoting real reform.  We have a problem, not at the periphery of our actions, but at the moral root of our thinking.

 

I have always enjoyed listening to economist Robert Johnson's brief excerpt below, because it highlights the very crux of the problem.  Unless some of the well to do and the professional classes shake off the lure of big money and the credibility trap, and start acting responsibly, this is going to end very badly.  

 

And make no mistake, there are some of the self-deluded and their servants who see that turmoil that may come as just another opportunity for their looting and a rise to greater power as they energize the mob for their own ends.  But they forget the great lesson of history, that once the madness is unleashed, it tends to serve none but itself.

 

Why should anyone stop lying and cheating, when they are so profitable under the rule of the modern gods of the market, power and money?   Why stop at all?  And then comes the inescapable agent of the downfall of excess, Nemesis, with all that it implies.

 

I have no illusions.   Given the state of our condition, ninety nine percent of those who read this will go on and do absolutely nothing differently for themselves or their people.   But it is in the moral one percent that there is some hope for peaceful, evolutionary change.

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

No More Cheating: Restoring the Rule of Law in Financial Markets

By Simon Johnson

The political debate about finance in the US is often cast as markets versus regulation, as if “more regulation” means the efficiency of private sector decisions will necessarily be impeded or distorted. But this is the wrong way to think about the real policy choices that – like it or not – are now being made. The question is actually what kind of markets do you want: fair and well-functioning, with widely shared benefits; or deceptive, dangerous, and favoring just a relatively few powerful people?

In a speech on Wednesday, Senator Elizabeth Warren (D., MA) laid out a vision for better financial markets. This is not a left-wing or pro-big government agenda. Senator Warren’s proposals are, first and foremost, pro-market. She wants – and we should all want – financial firms and markets that work for customers, that encourage innovation, and that do not build up massive risks which can threaten the financial system and bring down the economy.

Senator Warren puts forward two main sets of proposals. The first is to more strongly discourage the deception of customers. This is hard to argue against. Some parts of the financial sector are well-run, providing essential services at reasonable prices and with sound ethics throughout. Other parts of finance have drifted, frankly, into deceiving people – on fees, on risks, on terms and conditions – as a primary source of profits. We don’t allow this kind of cheating in the non-financial sector and we shouldn’t allow it in finance either.

The unfortunate and indisputable truth is that our rule-making and law-enforcement agencies completely fell asleep prior to 2008 with regard to protecting borrowers and even depositors against predation. Even worse, since the financial crisis, the Securities and Exchange Commission, the Justice Department, and the Federal Reserve Board of Governors proved hard or near impossible to awake from this slumber.

We need simple, clear rules that ensure transparency and full disclosure in all financial transactions – and we need to enforce those rules. This is what was done with regard to securities markets after the debacle of the early 1930s...

Read the entire piece here.

"The problem of the last three decades is not the 'vicissitudes of the marketplace,' but rather deliberate actions by the government to redistribute income from the rest of us to the one percent. This pattern of government action shows up in all areas of government policy."

Dean Baker

"Most of them became wealthy by being well connected and crooked. And they are creating a society in which they can commit hugely damaging economic crimes with impunity, and in which only children of the wealthy have the opportunity to become successful. That’s what I have a problem with. And I think most people agree with me."

Charles Ferguson, Predator Nation