Thursday, December 08, 2011

The Business of America

-- Posted by Neil H. Buchanan

Was Tony Soprano America's greatest fictional capitalist? One occasionally hears of real-life mafia bosses who defend their activities as "just doing business," and who are willing to say with a straight face that they are simply pursuing profit in a competitive environment. I suspect that some of them actually believe their own words.

The difference between the mob and regular businesses is, we hope, that the latter are operating within the law. Prosecutors who have tried to bring criminal charges related to the 2008 financial crisis, however, have discovered that the laws are so vaguely written that it is nearly impossible to bring a case. If that is true, does that mean that no one did anything wrong, or that the law cannot and should not be changed to prevent future crises, or something else entirely?

For a long time, it was extremely difficult to prosecute mafia bosses, under the laws that then existed. Congress then passed RICO, which (although quite controversial on civil liberties grounds) radically changed the game. One mob boss was recorded screaming about RICO, as his organization was crumbling under the weight of criminal prosecutions.

Direct, bloody violence is obviously quite different from business fraud and malfeasance. (Depending upon how one measures the direct and indirect effects, however, it is an open question which type of wrongdoing causes more damage.) Here, I am using the FBI's pursuit of the mafia as a touchstone to discuss the prosecution of business malfeasance not as a matter of moral equivalence, but to make the point (which ought to be obvious, but clearly is not) that the setting of any regime of laws and regulations is going to cause some people and businesses to change what they do, often in ways that they will not like. Asbestos manufacturers can no longer do business in this country. Automakers have to include a range of safety items in their cars and (to a lesser degree) trucks. Corn growers make a lot more money than they otherwise would, because of the various policies enacted by Congress and the states.

In my new Verdict column, I apply this basic insight to the attacks by some Wall Street political players on Elizabeth Warren, the Democrat who is running for the U.S. Senate in Massachusetts. Warren's views on financial regulation are well known, from her scholarly writing, to her work as the chief overseer of the use of TARP funds, to her advocacy of (and crucial work in creating) the new Consumer Financial Protection Bureau. Warren wants to change the law in a way that will almost certainly reduce the profits and bonuses of current Wall Street players, because it will allow people to understand the onerous terms being offered. The current players do not like that. The people who would gain -- consumers who are not cheated, their neighbors who will not see the value of their own homes go down when one-third of the houses on their block are abandoned after foreclosure, not to mention the other entrepreneurs who would thrive and profit under Warren's rules -- are not as well organized, nor as well-funded. (Even so, this is Massachusetts we are talking about, and Warren is now ahead in the latest poll.)

The point I make in my Verdict column is not just that changing the laws and regulations would lead to different results, but that Warren's proposals would lead to better results, both economically and socially. One can argue that there is a point where providing a marginal increase in material information to consumers is lower than the cost of providing that information, which means that the simplified version of the argument in my column is, to put it simply, simplified. Although that tipping point must surely exist, however, there is no reason to believe that we are anywhere near that point.

Wall Street's defenders point to the number of pages or words in the relevant regulations as evidence that there is too much interference in the market, but that is at best only one side of the equation. (Even as a measure of the costs of providing information, such numbers are grossly inadequate proxies.) Unless one believes that people are truly irrational -- surely an odd argument, if it were to come from people who otherwise tout the results of "rational expectations" and "efficient markets" theories as proof that we do not need government intervention in the first place -- then it becomes an insuperable challenge to explain why people were engaging in the financial transactions that they did pre-bust. If people are even close to self-interested maximizers, and they had access to accurate information about the deals being offered, they surely would not have signed on the dotted line.

My argument, in the end, actually became a paean to free-market capitalism. A person who is identified as among the most liberal people running for office today -- Elizabeth Warren -- is capitalism's greatest true believer. What does that say about the the rest of the Democratic Party? As I argued in a column last year, the Democrats in general have eagerly jumped on the me-too pro-business bandwagon. For most of them, however, they are not pro-business in the sense that Warren is (which, as far as I can tell, is the same sense in which I am pro-business). Instead, they wish to show the world that they are pro-business just like Republicans are pro-business. And that means doing things that business leaders tell them to do.

There are reasons that Dodd-Frank was watered down so badly, only one of which is the presence of Republicans on the Senate Finance Committee. New York's generally liberal Democratic Senators, especially Chuck Shumer, have had Wall Street's back throughout the process. Sure, these Democrats have pushed back a bit harder than their defeated Republican opponents would have. But they certainly have not been willing to say, as FDR did, that they welcome the scorn of the financial and business class.

As I argued in the column from last year, there is obviously a lot of distance between the pro-business views of people like Rand Paul (who believes that businesses should be free to discriminate on the basis of race, if they wish) and Barack Obama. That distance, however, is all along one dimension: Giving current businesses more or less of what they say they want. Obama brought in new advisors earlier this year who were touted as being pro-business, in a defensive move against the complaints from CEO's that Obama had been saying nasty things about them. There is no reason for a president to refrain from identifying and condemning bad behavior, yet Obama was so worried about being branded "anti-business" that he capitulated.

One of the more important reasons to have robust business and financial regulations is to prevent business leaders from going too far, in the pursuit of short-term profit. Now, with Obama's speech in Kansas being praised for a more in-your-face tone (a continuation of what I recently called the "last two weeks strategy"), it is possible to see the emergence of something more along the lines of a pro-business strategy that runs the risk of displeasing the current titans of American business. Republicans have clearly staked out the territory that says: "Prosperity depends on making the current elite happy." Democrats have to make the alternative case: "Prosperity depends on making it possible to make an honest buck, but no more."

6 comments:

mark said...

I am at a loss to find any laws under which the actors behind the financial crisis could be prosecuted. Neil, are you aware of any?

Neil H. Buchanan said...

In response to mark:

This really is surprisingly difficult, isn't it? Obviously, there are the usual run of fraud possibilities, along with securities violations. With the right facts, those laws would be available to pursue individual and institutional defendants. Apparently, however, the overall fraud was so systemic and so depersonalized that it is nearly impossible to put anyone of importance on the hook for wrongdoing (even civil, much less criminal).

The Times's business writer James B. Stewart had an interesting piece last week about how weak the SEC's case against CitiGroup is, for these very reasons:

http://www.nytimes.com/2011/12/03/business/few-avenues-for-justice-in-the-citi-case.html?_r=1&ref=jamesbstewart

Unless Congress writes an updated RICO-like law (unlikely, no matter which party is in control), this might all end with no significant legal ramifications for anyone.

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