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Where Were the Regulators? May 10, 2010

Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, politics.
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Via  Robert Reich:

What do oil giant BP, the mining company Massey Energy, and Goldman Sachs have in common? They’re all big firms involved in massive plunder. BP’s oil spill is already one of the biggest and most damaging in American history. Massey’s mine disaster, claiming the lives of 29 miners, is one of the worst in recent history. Goldman’s alleged fraud is but a part of the largest financial meltdown in 75 years.

All three of these companies are also publicly-held, which means that much of the financial costs of these failures will be passed on to their shareholders, many of whom are already watching their stock prices plummet. Prominently among those shareholders are pension funds and mutual funds held by people like you and me.

That may seem fair. After all, shareholders benefited when BP made big profits extracting oil without paying attention to a possible blowout, when Massey Energy got fat earnings from its careless coal mining operations, and when Goldman Sachs did wondrously well for its own stock holders by allegedly defrauding others. In fact, it was pressure from their shareholders seeking the highest possible returns — and their executives, whose pay is linked to the firms’ share performance — that led all three companies to cut whatever corners they could cut in pursuit of profits.

But profits aren’t everything, which is why we have regulations that are supposed to be enforced. So a key question in each of these instances is: Where were the regulators?

Good question. But, of course, if we believe markets know best so we don’t need government meddling in business affairs, we will get the regulators we deserve. That has been the prevailing philosophy for the past 30 years.

When shareholders demand the highest returns possible and executive pay is linked to stock performance, many companies will do whatever necessary to squeeze out added profits. And that will spell disaster – giant oil spills, terrible coal-mine disasters, and Wall Street meltdowns – unless the nation has tough regulations backed up by significant penalties, including jail terms for executives found guilty of recklessness, and vigilant enforcement.

Reich is right. We need strong government regulations. But that means we have to learn once again to trust government. And that means we can’t put people in charge of government agencies who think government is the problem.

No one in their right mind would choose to go to a doctor who did not believe in the power of medicine to heal. Yet, Americans persistently elect government officials who don’t believe that government can be effective.

Clearly, we are often not in our right minds when we vote.

book-section-book-cover2 Dwight Furrow is author of

Reviving the Left: The Need to Restore Liberal Values in America

For political commentary by Dwight Furrow visit: www.revivingliberalism.com

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Better People, Not Just Better Rules March 26, 2009

Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, Ethics, Political Philosophy.
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On Thursday, Treasury Secretary Geithner outlined his plans for re-regulating the financial system in order to avoid future economic calamities like the one we are experiencing.

His proposal includes more government oversight of risk-taking in financial markets and tighter control of financial institutions, especially regarding how much capital they must hold as a buffer against losses.

This, of course, entails a significant expansion of the power of government regulators.

No doubt these regulations are necessary. But they are not sufficient.

After all, the Federal Reserve under Alan Greenspan could have imposed tighter lending standards on institutions or higher interest rates to slow down the growth of the housing bubble without any change in regulations. And the SEC already had the authority to raise capital requirements for banks.

Any of these moves would likely have prevented the credit crisis. But none of these steps were taken.

The problem was not that the rules were not good enough; rather the people charged with implementing the rules didn’t think regulating the private sector was important. They believed the government should not exercise oversight despite the fact that it was their job to do so. The theory that government was an unfortunate obstacle to economic activity drove the zeal to deregulate, but more importantly, it influenced the behavior of officials charged with the task of regulation. It was ideology and its influence on the motives of individuals, not the presence or absence of rules and procedures that caused the collapse in our financial markets.

This is why I argue that we should stop thinking of political ideologies as competing ways of organizing society, and instead think of them as prescribing competing constellations of motives for acting.

We need better motivated people; not just better formulated rules. And that requires moral change, not just political change.