Homeowner's Blog

Go Bravely Forward

President Obama and Congressional Democrats are headed for a fight with the GOP and  Wall Street over financial services regulatory reform. The results of the financial meltdown have been disastrous, and clearly strong regulation is needed to prevent similar irresponsible actions by financial services executives. At the same time it is also possible to go too far, and some types of regulation could indeed hurt the economy more than they could contribute to preventing another meltdown.

Opinions on the latter vary greatly, and those opinions are mainly conjecture no matter which side they fall on. In the opinion of the financial services sector, all substantial regulatory changes are risky. If we heed their opinion, there will very little protection against another meltdown in the future. We've seen the results of the meltdown, and we would rather risk over-regulation than leave ourselves exposed to another financial meltdown. Besides, any regulatory excess will soon be corrected anyway. We can trust the financial services sector to get right to work on correcting any such excesses, even before President Obama signs the bill! That would be a productive use of their time and money. For that matter, even if the bill was virtually toothless, we can also count on the financial services sector to get right to work on watering it down further before President Obama signs the bill. Better that they productively spend their time and money bringing the measure back to neutral rather than gutting a weak bill entirely. At least that way we'll buy ourselves a couple extra years before the next meltdown.


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Is More Job Stimulus Legislation Needed?

More job stimulus legislation is needed to help displaced workers and perhaps more importantly, to prevent the recession from getting worse. How it is structured is less important than other priorities. Most government job stimulus programs are inherently inefficient, no matter what the delivery vehicle. So were the financial services firm bailouts by Presidents Bush and Obama, which have also created a moral hazard that must now be addressed. Senior financial services executives have effectively been rewarded for their bad decisions with bigger bonuses, while the firms' losses have been socialized to taxpayers, and their stockholders have suffered badly as well.

The government bailouts by both Presidents were necessary to prevent another Depression, and job stimulus programs are necessary until we get beyond the risk of a worsening recession. At this point the more important debate should not be about which job stimulus program will work better, but over which financial services reform legislation will be the most effective in preventing  senior financial services executives from taking further advantage of the current moral hazard. Once we've precluded the kinds of irresponsible decisions that caused the current economic crisis in the future, we will have prevented the need for both inefficient future financial services firm bailouts and job creation programs.

The Right Way to Punish AIG

The House of Representatives has passed legislation that would tax the bonuses of senior AIG representatives at a 90% rate. In one sense that approach is a good first step forward, and serves as a good example for how to approach similar abuses in other financial services firms. The step forward is that it is aimed at individuals rather than the companies. Companies don't make decisions, their senior executives do. Fine a company and you're really only punishing the stockholders, who in many cases are consumers who own the company's stock in their IRs, 401Ks or stock market accounts.

The mistake is that the House approach uses a shotgun where a scalpel is needed, it leaves the real culprits in place to wreak future havoc to our pocketbooks and the economy, and it micromanages personnel policies. 

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