All the ri-ra of pointing out how ridiculously and dangerously incompetent the private sector has become is fun, but in order to move forward there does have to be some practical policy come out of it. True the Dodd-Frank financial reform act did some good things—set up a centralized derivatives clearing infrastructure, etc., to help guard against stupid bullshit like AIG’s CDS gambling getting so far out of hand again.
But there is much, much, much more to be done in order to ensure healthy circulation of sound capital into actually productive segments of the economy, like manufacturing, instead of the life-draining vampires of the F.I.R.E. sector. Here are my current thoughts, which I’ll update and revise from time to time, as I encounter additional information and ideas. Feel free to share w/ your senators and representatives, and please do drop me a comment, under any blogpost, if you have additional refinements or suggestions. Nothing like dialogue to get the ol’ wheels grinding even tighter.
1. Property tax on large securities holdings. At the time of this writing (Dec. 13, 2010), it’s pretty clear that a Dow Jones Index over 11,000 and climbing make absolutely no sense with unemployment increased to 9.8%--unless there is a fundamental decoupling (or worse, inverse relationship) between financial markets the real economy. As we discussed in our thought experiment with Henry I of England, we know that part of the problem is the uncertainty caused by the proliferation of dodgy M3 into the money supply by unregulated public trading. But a corollary of that problem, which I’ll soon discuss in more depth in another blogpost, is the hoarding of actually sound money within the financial markets, keeping it away from truly productive enterprises with high fiscal multipliers who could use it to generate needed jobs, goods and services. It seems clear to me that the most straightforward way to break the logjam and get this show moving again is to institute a tax on holdings of publicly traded securities over a certain dollar threshold. Yes, it’ll have to be applied in a manner so as to reduce the impact on innocent retirees and legitimate charitable foundations, but it will have to happen; no society in its right mind has ever encouraged hoarding during famine conditions.
2. Mobilize private sector incentives to serve the cause of production rather than entropy. Another good thing in the Dodd-Frank Act was increased federal oversight of ratings agencies. To be honest, as of the date of this post, I have yet to become acquainted with the details of those provisions, which I understand are still being worked out on the regulatory rather than legislative level. And those details are crucial, because anything less than true accountability on the part of those agencies will almost guarantee a recurrence of asset bubbles like the mortgage mess. But there are some very simple, market-based strategies which I believe are far more powerful than any 100,000-page regulatory guide could ever be, and here are a few of them:
a. Require ratings agencies to be hired by the federal government, rather than the companies seeking to market the securities in question. Certainly, as a component of the nation’s M3 money supply there is a strong public interest in ensuring the integrity of such securities’ value. I can see no legitimate reason to continue to allow an essentially corrupt patronage relationship to exist between these companies and the rating agencies. As long as ratings agencies work exclusively for the companies promoting the securities, the public’s interest will never be adequately protected. No responsible government would ever allow such a foolish policy to continue. This could be funded through a registration tax payable to the applicable federal authority—I propose the Treasury Department.
b. Auditors should be hired by the SEC, and they should receive some additional incentive pay for discovering violations. There is no reason that financial auditors should continue to be hired by the audited company’s board of directors. It is a lying sham to pretend that boards have any real interest in publishing a truly independent evaluation of the company’s books. As long as the boards can reasonably believe that the burden of failure will be born by taxpayers instead of shareholders, as 2008 proved, the boards have every incentive to lean on accountants to churn out bullshit audit reports that at best conform to silly, irrelevant standards. In the short term auditors may wince, or even laugh at the suggestion, but in the long run, not only will this change help ensure greater integrity of the reports, but will allow them more market leverage. At least part of the cost of such measures could be defrayed by abandoning the farcical Sarbanes Oxley internal control audits, which have such ridiculously subjective standards as to totally neuter them with regard to their stated intent; my personal favorite examples of this legislation’s failures are the recent Sachdeva affair in Wisconsin and the nationally better-known case of Lehman Brothers. In both of these cases, as well as in a multitude of others, Sarbanes Oxley procedures provided absolutely ZERO benefit. Get rid of it and make way for more effective real-world solutions.
c. As a corollary to ‘b.’ above, the current self-'regulatory' status of the public accounting profession has to go. The auditing firms, whose alumni run the so-called FASB, are up to their eyeballs in conflict of interest with their publicly traded clients. To the point where there is no hope of worthwhile standards being promulgated; there is no conceivably rational universe in which hopelessly arcane instruments like AIG’s credit default swaps would ever have been allowed to proliferate and receive the sanction of audit reports from prestigious accounting firms. This bull shit is utterly needless. The government must have the authority to protect the integrity of its M3 money supply through the oversight by the SEC.