The Fed and DC Celebrity Culture

One of the worst things about the ceaseless cable reality show of Washington is its tendency to lionize individuals as celebrity heroes, say, poor Alan Greenspan, not to mention all the other clowns down there who clamor for the role of Dear Leader, becoming experts in the end at only that. We seem addicted to an endless passing out of prizes and gold stars for which anyone and everyone are considered entitled, even Caligula’s horse, like Rome at the end. Jacques Barzun wrote the book entitled Dawn to Decadence—and he meant it. If you are in a habit of confusing excellence with personality, assuming your own conclusions and emulating past patterns, then you simply will make mistakes. Are the Hero’s confident assurances and future predictions correct? Do they persuade you that he is a “good man” and if he is, do you think his moral goodness in itself is enough? Is he a smart man?  Is he a roll up the sleeves and get under the hood man?  Does he understand how the nation and its markets work?  And, does he have a good team?  It seems to me that all of these questions must be asked, not only the first two.  And despite the conventional revulsion over Jimmy Carter’s supposed detail minded tendencies, there are times when you need just that.

Markets only function properly given certain conditions. The government has taken on, by law, the responsibility to encourage conditions that conduce to market integrity. These consist of things like diversity and competition in the specific industry; the existence of conditions for caveat emptor to operate, as opposed to conditions of subtle deceit, or follow the leader obfuscation through herding; the presence of full, fair disclosure of all material facts; the existence, in the proper sequence and structure, of arms’ length bargains (which are ethical purges); and absence of conflicts in each level of transaction. Care must also be taken with what the market climate is and the relationship between conditions of the past, conditions of the present, and conditions likely to be in force in the future. In short markets must not be rigged. And what does rigged mean? That depends on what market you are talking about, in what conditions, and when. Or grossly unfair. Grossly? Yes, because the law, spelled out in advance, can’t do everything. When people try, they are forced to resort to being confusingly vague.

The Fed is not tasked to be a regulator. Still less does it “run the economy.” (Most politicians seem wholly unacquainted even with this fact.) It is a central bank. If “the economy” is to be “run” at all (and mostly it should not be) that is what Congress and the President are supposed to do, and with all due caution—not the Fed. Only Congress and the President are democratically accountable in our constitutional system. In theory they are accountable for their mistakes, but I’ll Be Gone You’ll Be Gone (IBGYBG) is in full operation there as much or more than it is in investment banking. This is an inherent problem of agency anything—the third party (payor, or any other kind of person to whom the buck is passed) problem. Congress and the President try to evade even the very limited accountability they have to begin with, by delegating to agencies. Agencies have little accountability in part by design; they are tasked to execute details, to do a job handed to them like any diligent employee, not to tend to any big picture. Often they have life tenure job security, and this makes people sleepy eyed and to some extent negligent of anything except what they might get in trouble for, or what is personally inconvenient to them.

The Fed is basically a research institution. It is not an economic regulator. It is a macroeconomic reader of the economic State of the Nation. It is supposed to be a think tank, wholly separated from politics, that is, it is supposed to be completely apolitical and only gather and read data, then manage total money supply to smooth out historical bumps in the road. This cannot be mistaken for “running the US economy.” The US economy and the fairness of its society is a function of the well-calibration, or not, of its laws. The sheer bulk of the laws are out of control. This mindless bulk wreaks havoc with the underlying legal system. One way of dealing with this state of affairs is to develop an insouciant contempt for the very existence of laws or regulation. This is to be seen in today’s attitude of “so sue me,” or “you’re gonna make a federal case outta that?” followed by Wile Coyote-like evasion. Like the internet, the more there is of a thing, including laws, the easier and even the more necessary it is to just ignore it. Thus, the very status of law in society has declined with its increasing mass and lack of quality from remorseless efforts to mandate results no law can ever accomplish. One might say the same of physical books, which at least have a manufacturing cost barrier to overproduction, or once did. The mere word “book” or “law” still has some juice. Good branding.

We all enjoy seeing a Hero laid low. But Greenspan did not act alone. Greenspan is a victim of the economic assumption that all US markets — because we are America! — had all the legal components of integrity in place that had been reasonably well wrought for the common stock and bond markets of the 30s. The regulatory establishment, doubtless busy with many other important things, failed to notice that Fannie and Freddie’s securitization process was not a “market” process. It was a vast national insurance program, government guaranteed. When, in 1968, Fannie and Freddie were privatized, the regulators failed to apply the requirements of the securities law. They just assumed that whatever Fannie and Freddie had been doing was fine for Wall St. to just replicate, introducing “competition.” Securities law has at its root a structural economic analysis. These are minimum basics which HAD to apply to what self-interested private actors were now being enabled, by the government, to do. The regulators who should have been immediately alert to the national implications of creating a commons problem, from 1968 to the present, totally ignored it, and failed to put in place simple universal loan quality rules (in fact, the political pressure was all to do the opposite, remove and debase all rules of loan quality). The government process of national insurance packaging that banks were now being told they could, and should, emulate, as a mechanical matter of assembly and sales, was not a market at all. For banks to just imitate what Fannie and Freddie did eliminated a critical level of arms’ length transaction, in the analogy to securities sales. As every engineer knows, if you wipe out a level in your file path or circuitry, you might be switching a 1 to 0—producing, at the end of the line, the exact opposite result from what you expect. Everyone who might be considered to have been “in charge” in the country, most especially our national experts on this, the securities regulators, ignored these very large important considerations relating to the basic integrity of the nation’s markets. Charitably, they were mired in too many details to see the issues. Less charitably, all they cared for was to get back to their cozy, unchallenging 9 to 5 routines, or to posing for photo ops and taking meetings.

Hence, writ large, this regulatory establishment, and their alleged overseers Congress, are to blame. It is much more damaging to have veritable frauds pretending to regulate and so conning people into failing to take care for themselves, than to have no regulation at all. Presidents may not be to blame, because Congress strips them of managerial control over numerous agencies. The President is thus disabled from playing his check and balance role in the constitutional line up, for he can fire no one, nor manage their operations, a situation many consider to be flatly unconstitutional. The dogged effort of partisans to isolate blame to Alan Greenspan (or on the flip side, to Fannie and Freddie themselves) is just that. Partisan.

The regulatory establishment is, like the US military, just too large and too unaccountable. Too large and hence too incompetent. And ill managed. Yes of course I’m sure there are pockets of exception. If Congress exempts agencies from control by the President (thunder about an “Imperial Presidency” is usual here) and then gets back to campaigning, then all you have is a corporate entity managing itself in its own self-interest. The mish-mash of ill-conceived and ill-constructed laws with their resultant unsupervised regulatory tangles from Congress is today what we have most to fear, Obamacare being one possible awful example, whatever its benign intent. “Doing something” for the cameras, however destructive, has become the order of the day. Perhaps the solution (already rising in the land) is rising contempt for the law in itself. Its symptom is the rise of marketable sophistry. Hired gun lawyers are taking paid dog eat dog adversarialism to the status of a near religion. A “scientific” one. (This is why extremisms in the worship of “The Market” can indeed be plausibly compared to Marxism.)

I for example cannot really take any Hollywood film option/license or its net profits rider seriously. Any more seriously than I can the scribblings within a CDO squared.

It is getting to be true even of book publishing contracts, some of which have been rewritten into long, nonsensically hyper-regulatory instruments chock full of preposterous deconstructive reversals on prior custom, and other types of malicious mischief attempting to subvert the economics and law of publishing.

We have in this nation now an epidemic of the over-specialized. Economists are overspecialized when it comes to national policy-making. Policy is not supposed to be amateur hour, but an art governed first by good faith on behalf of the nation. Too many lawyers today do not understand core principles of how law supports economics, and how economics underlies law. They lose themselves in words and meretricious arguments that can be easily spun out of mere words.

The idea of the legislative, the executive, and the judicial branches was two things: a separation of powers in a division of labor, and their integration by way of check and balance among these distinct governmental corporate functions. Executive was supposed to mean management, and that has been disabled. Following FDR’s lead, we have created a counterproductive hyper-specialization that leaves no one in charge. The grown-ups are absent, and no one sees the forest for the trees. Seeing the forest, however, does not mean that Dear Leader commands it. American society wants to recharacterize itself as some kind of 100% no-fault, limited liability state for anyone in a CEO type role. No personal responsibility for anyone, no assumption of risk (with various legal instruments and “complicated” special devices used to accomplish this)—except for the poor. This is not capitalism. It is socialism in capitalist sheep’s clothing, limited to a particular class—the corporate and political elite.