The Supreme Court Corporation of America

[ThePythonicCow]

Re: The Supreme Court Corporation of America

Regulatory policy needs to be counter-cyclical. When times are good and the banks are in strong competition with each other to lend money to consumers, regulation and oversight needs to rise. When times are tough and consumers are fighting for a few available loans, regulation and oversight needs to be cut. Instead we get the opposite.

Please allow me to present a differing view.

May I suggest that the purpose of regulation is to reduce corruption, hence that regulation should run cyclic to corruption (not counter-cyclic to general economic prosperity.) When there is too much corruption about, ramp up the enforcement.

In my view, we still have an excess of debt and corruption. So we need further debt reduction (by whatever means, it will be painful) and stepped up regulation (more laws or better enforcement, whichever.)

To suggest, as it seems to me you're doing, that we need less regulation now in order to increase debt seems to me to be imprudent.

Yes, my recommendations would continue to reduce prosperity. I would suggest that such further reduction in prosperity is inevitable, until we reach

• a level of economic activity that is sustainable using lower energy availability,
• a level of debt that is sustainable on that lower level of economic productivity, and
• a higher, sustainable proportion of our economic activity going toward improving and maintaining means of production, rather than toward conspicuous consumption.

[Aetius Romulous]

Re: The Supreme Court Corporation of America

This is one of many issues - that we are always reacting, always chasing. Always behind the curve. There are areas of finance and economics where this is part, if not all of the problem as your comments make clear.
What is needed in places like that is immunity from that whipsaw, through public policy and law with firm, long horizons. Re-thinking risk might accomplish that, by accounting for externalized and systemic costs. Updating the corporate form might also buttress capital markets through increased stability and long term protection.
Regardless, the very last medicine needed by anybody is another spasm of knee jerk populism but as you say, we are in all likely hood going to get it just the same. With inevitable results.
I wouldn't touch this market with a ten foot barge pole. Tic Toc.

[vinoveri]

Re: The Supreme Court Corporation of America

The last thing banks need now is taxation and other policies that reduce their ability to lend. A tax is a cost that must be passed on. In the case of banks, it will be passed on as higher interest rates and fees. Unfortunately, populist politics may win the day, giving us yet another reason to doubt the vigor of the economy in 2010.

Agreed, taxes and other regulatory costs imposed on banks would ultimately be passed on.

But the focus on the "Volcker Rule", which is all I've heard for now, and call it populist if you like, but it is common sense. I agree with Hudson that the banks should be run like utilities. They're given a backstop to run the following business: borrow low (take deposits) and lend high (provide loans to consumer and businesses). This is a simple business that can generate large profits and high dividends for shareholders (just maybe not as much as before). The fee based gov backstop (FDIC) guarantees that banks will get depositors ... So yes the whine from the financial industry that not letting them be hedge funds and have prop trading desks backstopped by the gov will cause them pain (read: "not making as much as I used to") and the USA will lose the "top talent" (whatever that means) falls on deaf ears.

[FRED]

Re: The Supreme Court Corporation of America

i think the object of the game would be to do these things with a way and time frame that would not punish but transition to wider, more stable opportunity.

My current example is the EU, where over many decades they cobbled together a reworked set of law and accounting that they could sell to everyone. That was Europe though...what do those guys know except the full scope and breadth of history, and millenniums of punsihing error by sticking with outdated ideology. Getting the French and Germans to agree must have been easy LOL.

Our view, from an upcoming piece, one of the reasons we are not bullish this year:

Vilification of banks, political hay made thereby

Regulating banks was a good idea back before the crisis, such as when we issued our warning about Credit Risk Pollution in 2006. Regulatory policy needs to be counter-cyclical. When times are good and the banks are in strong competition with each other to lend money to consumers, regulation and oversight needs to rise. When times are tough and consumers are fighting for a few available loans, regulation and oversight needs to be cut. Instead we get the opposite.

The current commercial banking crisis makes the early 1990s crisis look like a cocktail party.

The banks have their hands full as it is, dealing with the inevitable result of lack of regulation that caused them to fight for consumers and make terrible loans to beat the competition.

The last thing banks need now is taxation and other policies that reduce their ability to lend. A tax is a cost that must be passed on. In the case of banks, it will be passed on as higher interest rates and fees. Unfortunately, populist politics may win the day, giving us yet another reason to doubt the vigor of the economy in 2010.

[Aetius Romulous]

Re: The Supreme Court Corporation of America

i think the object of the game would be to do these things with a way and time frame that would not punish but transition to wider, more stable opportunity.

My current example is the EU, where over many decades they cobbled together a reworked set of law and accounting that they could sell to everyone. That was Europe though...what do those guys know except the full scope and breadth of history, and millenniums of punsihing error by sticking with outdated ideology. Getting the French and Germans to agree must have been easy LOL.

[Jay]

Re: The Supreme Court Corporation of America

Thats the problem with a regulation, it simply inspires motivated people to game the system, where the rewards of doing so are large enough. And in banking, the rewards are large enough.

Again I suggest...why not simply change the corporate format, and be done with the regulation game? Better still, standardize and repair an accounting system that was created in the middle ages.

Can you change the corporate format and make it stick?
Concerned citizens vs. very rich, very powerful psychopaths.
Tricky, but I'm all for it. It would mean that the vested interests go to war against the people. It could get ugly. They seem to have all branches of the government pinned at this point; except the Massachusetts Senate race that is.

[dcarrigg]

Re: The Supreme Court Corporation of America

Thats the problem with a regulation, it simply inspires motivated people to game the system, where the rewards of doing so are large enough. And in banking, the rewards are large enough.

Again I suggest...why not simply change the corporate format, and be done with the regulation game? Better still, standardize and repair an accounting system that was created in the middle ages.

Aetius, you may be right. Still some part of me hopes for the spirit of the law to come back into vogue. These letter of the law, game the system arguments are nauseating.

[Rajiv]

Re: The Supreme Court Corporation of America

A Good article by Manuel Garcia - Corporate Personhood and Political Free Speech

.
.
.
.
.
Indeed, the ideal remedy would be federal legislation -- ideally as a constitutional amendment -- defining "personhood" as solely the property of individual living human beings, and specifically not so for any corporate entity. Thus, corporations would be stripped of 1st, 5th and 14th Amendment rights. In brief, these Amendments define:

(1st) freedom of: religion, speech, the press, assembly; and freedom to petition;
(5th) indictments, due process, self-incrimination, double jeopardy, eminent domain;
(14th) citizenship.

The pernicious effect of allowing corporations 1st and 14th Amendment rights -- hence, the right to lobby Congress -- is evident today in the many distortions of government and public institutions to the detriment of the public good: 'pork barrel nation.'

Corporations can often be far wealthier than individual citizens, and thus capable of buying far more power (of any and every kind) to prevail in any contest with a human adversary. Also, corporations can outlive a normal human lifetime, and so have a temporal advantage over actual humans: corporations can use delay till a human contender's money is spent, or life expended. Of course, the best insurance for corporations is to use the wealth invested in them, and their possibly superhuman lifetimes, to acquire dominating political influence so as to shape the government and the laws to their particular economic advantage.

Corporations combine superhuman attributes for potential wealth accumulation and longevity, with the subhuman attribute of lacking an immediately responsible actor to be held accountable for the consequences of corporate actions. This combination is an affront to the very concept we actual human "persons" have of our individual selves, and it should not be equated with human reality in the laws devised to regulate human society.

[Aetius Romulous]

Re: The Supreme Court Corporation of America

Thats the problem with a regulation, it simply inspires motivated people to game the system, where the rewards of doing so are large enough. And in banking, the rewards are large enough.

Again I suggest...why not simply change the corporate format, and be done with the regulation game? Better still, standardize and repair an accounting system that was created in the middle ages.

[Rajiv]

Re: The Supreme Court Corporation of America

As aaccent to your article is this one from the Business Insider - Big Banks Have Already Figured Out The Loophole In Obama’s New Rules

This serves to highlight the point that regulations have to be carefully written so that they cannot circumvent the intended purpose of the law.

Big banks have already begun poking the holes in Obama’s new rules—holes they expect their banks to pass through basically unchanged.

The president promised this morning to work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

But sources at three banks tell us that they are already finding ways to own, investment in and sponsor hedge funds and private equity funds. Even prop trading seems safe.

A person familiar with the operations of one big Wall Street bank said it expects that new regulation will affect less than 1% of its overall business.

The key phrase is “operations unrelated to serving customers.” The banks plan to claim that much of the business in which it engages is related in one way or another to serving customers. Even proprietary trading, for instance, can become related to customer service if it is done through internal hedge funds in which some outside clients are permitted to invest.

One insider at a bank pointed to JP Morgan Chase’s ownership of the hedge fund Highbridge Capital. It is thought that under a strict “no hedge funds” rule, Highbridge would have to be sold off. But under the rule proposed by the Obama administration, Highbridge can be retained by JP Morgan because outside clients are permitted to invest in it.

A still more devious way is to have a banks own employees be the customers who are invested in the internal hedge funds. That way trading operations can remain closed to outsiders while the regulatory requirement of relating the trading to customer service is met. Goldman Sachs is rumored to be considering this approach. (Goldman isn't commenting on the regs right now.)

“This thing is about showing the public that Obama is standing up to Wall Street. So the rhetoric is heated. But the implementation will require far less change than people think right now,” a person familiar with the thinking at the upper echelons of one of our largest banks said.

“The market is getting this wrong by selling off the megas,” a person at another bank said.

[cjppjc]

Re: The Supreme Court Corporation of America

There is no denying it, it does appear a human trait to hate bankers. Probably some kind of inbred jealousy we won't admit too LOL.

Don't say jealousy plays any role.

[Aetius Romulous]

Re: The Supreme Court Corporation of America

Thank you for the kind words.

I never found it that dismal - soul crushing at times, but never dismal.

[Aetius Romulous]

Re: The Supreme Court Corporation of America

Thank you.

[oddlots]

Re: The Supreme Court Corporation of America

Regardless, it is curious to me that there has never been any discussion about the corporate form itself. When the TV don't work, check if it's plugged in first. Just find that odd.

The other is accounting. How on earth can you get popular support for dull accounting? But that's where the real fix lies I believe.

Re. the corporate form itself, you're right, it's odd. One of those things you somehow imbibe at the breast in capitalist countries is that a social good is best approached sideways. It's like that parable about a pot of gold you can only dig up if you don't think of a unicorn while you're doing it. (D'oh.) Overall prosperity can only be a by-product of individual self-seeking advancement, not the stated goal.

This has never bothered me much, except when the self-seeking is actually not productive but destructive and parasitical and no-one, generally, seems to notice. (Like with bankers, but don't get me started on those guys!!! )

Your point reminds me of C.B. MacPherson, a Canadian political philosopher I read years back. As far as I recall his main critique aimed at liberalism was this: there is no content here, just the outline for a system with an endless pursuit of material prosperity which rules out any discussion of what any of it is for. (I think I can hear Medved's turret turning this way. ) He argued for embracing a positive, substantive goal: that of maximising every individual's potential. Sound's like a "Worthwhile Canadian Initiative," no? (He was far more interesting than I'm making out FWIW.)

But more generally regarding finance, I have a sinking feeling that the main thing I'm missing in trying to understand our current straits is the obvious insatiable demand for "capital efficiency" that the system generates. Think of the explosion of derivative products that is ongoing. This is generally bemoaned by the likes of me but I suspect that it is the most telling feature of the current landscape: debt-money systems cannot run in reverse so this endless quest for a tiny increment of "efficiency" is all that's keeping the collective bike up. I suspect both that this is the real leverage finance has over the world's governments and that no-one knows how to exit from the predicament.

If my anti-banksters stance is bullsh!t this is probably the best reason why.

Re. accounting, yes and tax policy. zzzz

[Aetius Romulous]

Re: The Supreme Court Corporation of America

Very Kool..thank you!