The Puzzle of Properly Regulating American Finance
The Puzzle of Properly Regulating American Finance
Two very good brand-new books very much worth reading...
I really ought, by this stage in my career, to have a relatively strong and well-informed view of what kind of financial regulatory system is appropriate for which of the many stages in the development of first the industrial and then the post-industrial market economy.
But I find I do not.
I have a lot of scattered insights. I have a great deal of knowledge of what individual market failures and externalities are. But I have never bothered—or is it I have never been able?—o think through how the entire picture adds up.
And I do quail at the task: it would be a very hard thing to do.
Here, however, our two very important pieces of grist for this particular mill:
Are Index Funds Making the Economy Less Fair?
“Taming the Street,” by Diana B. Henriques, and “The Problem of Twelve,” by John Coates, tell the story of America’s powerful and unwieldy financial institutions…
J. Bradford DeLong :: Sept. 12, 2023, 5:00 a.m. ET
TAMING THE STREET: The Old Guard, the New Deal, and FDR’s Fight to Regulate American Capitalism, by Diana B. Henriques <https://www.amazon.com/dp/B0BPX762S3>
THE PROBLEM OF TWELVE: When a Few Financial Institutions Control Everything, by John Coates <https://www.amazon.com/dp/B0BW65PTNV>
“The rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence,” President Franklin D. Roosevelt said at his first inaugural in 1933 as he kicked off his New Deal. “The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.” The direct reference to Matthew 21, and F.D.R.’s implication that he was going to do the work of the Lord in cleansing the temple of impiety—those were deliberate…
"[I]t is undeniable that there are now an uncomfortably small number of uncomfortably large players in the fund-management and private-equity branches of American finance, in addition to our too-big-to-fail super big banks"
My own preferred solution to this is for us to have a sovereign wealth fund, so we get government officials who are accountable to the Treasury Department and to Congress overseeing the fund managers directly. (This comes with its own suite of problems around political influence, but I at least hope these would be better than the current problems where fund managers are basically not accountable at all.)
Do an _add-on_ to Social Security -- not the carve out that Bush the Younger proposed -- where we give everyone an account that invests in target-date tranches of the Sovereign Wealth Fund, accessible through postal banking. The cash part of the account is usable for basic checking, receiving direct deposits, etc. So we've resolved the problem of "the unbanked" along the way, and created a receiving point for various government cash benefits, including "helicopter drops" in future recessions.
Fund young people's accounts with Cory Booker's "baby bonds" concept, defaulted into a tranche that "matures" (i.e. the asset mix reaches a conservative blend to preserve the money) around when they turn 22. They can withdraw from that for continuing higher ed, or for a real estate purchase, or for a business investment.
Also default everyone into putting some slice of their paycheck into a tranche that matures when they turn 65. Encourage companies to start moving away from the boondoggle of the 401k system with its exorbitant fees, in favor of just using the SWF. (It may well be that the SWF farms money out to many of the same fund managers, but because of its size it will at least in theory be able to drive a much harder bargain.)
Schrodinger's cat is already out of the box and can't be put back in. It's not so much the index funds being problematic but that hedge funds and private equity are trampling over almost every sector and sucking up assets left and right. There is not a real good way to regulate this sector other than proving some sort of financial crime. Obviously changing the tax code so that income the partners derive from these funds are taxed as ordinary income and not capital gains would be one step forward.
Gretchen Morgenson, in an almost unreadable book, documents some of the real bad actors who have bought up doctors practices and nursing homes. Unfortunately, asset purchasing is not illegal other than anti-trust considerations. Governments seem to be far more worried about what Google has become than more dire threats to the economic well being of our country. Of course we can look for the Republican Party to continue to carry water for the privileged class.