Daily Archives: 17 August 2012

A Modest Proposal for Financial Law

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Standard Chartered PLC agreed to pay a $340 million “fine” for improper financial transactions amounting to $250 billion, a fine of just a tad over 1% of that total.  Judge Jed Rakoff, of the United States Federal District, refused to sanction a proposed settlement between the SEC and Citigroup Global Markets of a $160 million “fine” for an improperly handled billion dollar CDO fund, arguing in part that there was no basis for a punitive settlement when there was no allegation or admission of a wrongdoing.

It is, in fact, routine for supposedly misbehaving financial entities and their Federal regulators to negotiate such chump change fines, whether or not actual wrongdoing is conceded or alleged.  This disconnect between the sanction and the (phantom) misbehavior generally is not the result of cronyism; all the players are, say I, fundamentally honest.  No, such settlements are driven by the complexity of our financial laws, of which Dodd-Frank is only the latest addition.  The defendant financial institution usually finds it cheaper to pay the government’s vig than to defend itself, even when innocent, and the government usually finds it cheaper to charge only a taste and make no demand for admission of wrongdoing than to prosecute a case.

As a result of this unnecessary complexity, the government simply continues to hector the financial institutions and the financials simply continue to misbehave (my remark about honesty not withstanding) with the settlements just part of the cost of doing business.

Accordingly, a modest proposal.  Get rid of the financial laws and the regulations.  Replace them with a few simple laws (which, in their simplicity will need no implementing regulations) to the effect of honoring freely signed contracts, the products sold having to be openly and clearly described, all parties to the contracts, and their roles, having to be clearly and openly described.  There might be one or two others, but you get the idea.

Then get serious about cases.  If these laws are violated, hale the miscreants into court and go for serious penalties.  No more “negotiating” pocket money payments.  That’s like negotiating with Willie Sutton over his “community service.”  $250 billion in illegal trades ought to get that much as the floor of a fine.  If that puts the misbehaving company out of business, I suggest that a criminal organization won’t be missed.

Obama and Jobs

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Here’re a couple of charts that illustrate the impact on American joblessness caused by Democratic Presidential Candidate Barack Obama’s economic policies.  They’re from an article last spring by Dan Mitchell, writing at The Center for Freedom and Prosperity.

This graph shows the degree of long-term joblessness extant in our present economy.

For almost the entire post-war period, long-term joblessness had been stable, if noisy, around a low rate in the range of 10%-15% of total unemployed.  But throughout the administration of Democratic Presidential Candidate Barack Obama, this long-term unemployment travesty has skyrocketed into the 45% range—nearly half of all of our unemployed in the present economic dislocation have been out of work long-term—for six months or more.  Larry Summers, ex of Obama’s National Economic Council suggests a reason:

Empirical evidence shows that two causes are welfare payments and unemployment insurance.… The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work.  Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job.  Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.…  Clark and I estimated [in a study using state data on registrants in Aid to Families with Dependent Children and food stamp programs] that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months.

Another reason is the inordinate spending and borrowing generally of the present administration, which I addressed in another post.

The chart below shows another effect of Obama’s policies on jobs: the size of the labor force, or the number of people working, at least part-time, or still actively looking for work.

The labor force shrank by roughly four per centage points from the start of our current economic Time of Troubles at the end of the Bush the Younger administration.  And it has remained flat, rather than recovering as it did in earlier times, throughout the Obama administration.  This also is associated with the above long-term unemployment.  After a sufficiently long period of failure, people just give up trying to find work—they don’t see that there is any to be had.  And it’s been that way for nearly four years, now.

We need to change the Federal government’s economic policy.  For that we need to change the Federal government’s Executive and Senate personnel.