The next big-ticket legislative item is financial services regulatory "reform", which actually should consist of reinstating regulations that used to exist but no longer do. In any event, I would like to suggest a way of framing this issue that might provide some traction with the public, offering a better chance to pass it.
For the most part, both supporters and opponents see this as an issue primarily of economic regulation, which is to say something unrelated to the general health and welfare of society apart from money-making. Yet, if we should have learned any lesson from the collapse of the financial services sector a couple years back, it is that the theory of atomized, free-standing institutions acting on behalf of their most basic self-interest - profit - do not actually understand the most socially acceptable means of achieving those ends. If pursuing the profits within a financial bubble increases profits, then they will do so. The notion that those who did so acted without understanding that the housing market was overinflated in value is, at this point, incomprehensible. I am not by any means one who understands these issues, yet as early as 2007 it was clear to me that real estate values were hyperinflated. Furthermore, I made occasional statements to the effect that far too much credit was already extended on overinflated mortgages, which were in turn treated as assets rather than liabilities. I called it, at one point, a house of cards, needing only a slight breeze to bring it tumbling down. The breeze came, and down it all came.
As Congress gets ready to consider ways to police the financial services industry, it might be important to talk about the entire project less in terms of old-style industrial or economic regulation. Rather, the lesson from our most recent catastrophe should indicate that setting limits to the actions of financial markets; making determinations of what are and are not proper actions for players in the game to make; separating out consumer banking from investment banking (reinstating Glass-Steagall in some manner, fashion or form) - all of these and other steps that should be taken whether they are planned or will be done is another matter . . .) should be discussed as a further extension of the social safety net. These are not "restrictions" on "economic growth" done in the name of envy, or spite, or as a punitive measure that can be removed as the economy improves. Rather, these measure are being proposed as a way of protecting all of us, not least the financial services sector itself, from the dangers inherent in their own propensity for reckless behavior. Setting aside any question of theory, it should be repeated, again and again, that we are living through the empirical refutation of the idea that an industry free of serious oversight and administrative limits on action will act in ways that serve not only its own bottom line, but its most basic self-interest, survival. We are also living through empirical refutation of the notion that we can treat any sector of society as separate in some way from the rest. The collapse of the financial services sector nearly brought the entire US, and the world, economy, to a halt. Any time someone starts to talk in this fashion, just repeat, politely and firmly, that this theory is no longer tenable based on our collective experience.
We seek to regulate and oversee the financial services sector because we wish to protect the entire country from the ill-effects of bad decision making in an unregulated market. Time and again we have experienced that industries tend toward self-destruction, whether in the short- or near-term, and the results have been social calamity. We are seeking to regulate to protect the entire society from the effects of free markets.
