Even before the crisis, polls showed that the public overwhelmingly favors regulation to protect ordinary citizens from shoddy products and sharp practices. The spectacle of failure being rewarded during the financial crisis while the rest of us suffered in the resulting economic downdraft has led even people who are cautious about regulation in goods markets to acknowledge that finance is different and needs vigilant oversight.
The Massachusetts Senate race provides a reminder. Scott Brown has been playing up the bankster caricature of Elizabeth Warren a a power-mad, business-hating Commie. If anyone bothered checking her calendar during her time as a consultant to the Treasury launching the CFPB, it shows that Warren bent over backwards to meet with bankers and solicit input. And the idea that the sort of regulation that Warren favors is bad for the public (or anyone other than overreaching businessmen) is a stretch (remember, Warren was once a Republican). And of course, this sort of attack serves to reinforce the canard that regulation is bad (as opposed to “bad regulation is bad” just as “bad Scotch is bad”)
The fact that Warren took her job as the head of the Congressional Oversight Panel seriously produced a huge win for the public. As Matt Stoller recounts in an article in Salon, the COP under Warren incurred $10.7 million in expenses. One action alone, that of finding that Treasury was letting banks buy back their TARP warrants on the cheap, saved taxpayers over $1 billion. That isn’t Warren campaign PR; that’s the conclusion of a new paper by Lucas Puente, a Stanford political scientist, published in PS. Political Science and Politics. Similarly, while Neil Barofsky’s role at SIGTARP was circumscribed (he could only pursue frauds that were directly related to TARP), he separately saved over a half a billion of taxpayer monies.
More generally, the case for government intervention is strong when externalities are involved. “Externalities” is economese for “when the parties to a transaction impose a cost on an unrelated party.” The prototypical example is pollution: the factory in your town that sells all its output to bigger companies pumps out particulate garbage and you get a lung disease as a result. Economists often rely on the work of Martin Weitzman in determining how to deal with this sort of problem, since there are two broad courses policymakers can take. One is to tax the polluter, to make his cost of goods reflect the true social cost. The other route is prohibition or regulation, so simply forbid him from doing certain things unless he meets certain standards.
Weitzman’s argued that the government can never get this perfect, so the question of which approach to use depends on social costs versus private costs. If the cost to the polluter of fixing the problem was high and the cost of the pollution was comparatively low, then taxes are the better route (to discourage production around the margin and pay for the costs to the damaged parties). If the costs to the public are higher than the private gains, then regulation and prohibition are preferable. Given the massive costs of the crisis (just look at how the periphery countries in Europe are being ground down so as to keep from exposing the insolvency of French and German banks, one of the results of the crisis, as well as the costs of the pump and dump housing game in America and the lousy employment market), it’s not hard to see that regulations are the right remedy as far as the financial services industry is concerned. So Warren’s and Barofsky’s successes aren’t special cases; they are the sort of outcomes you’d see regularly if we had regulators who didn’t see their stint as an employment agency for big ticket bank jobs (and don’t tell me people like that don’t exist; I can name two dozen capable people who have the right skills and mindset without thinking very hard. The issue is not the inability to find “talent”; it’s that the current political apparatus keeps them away from those positions).
It’s annoying to hear the simple-minded anti-regulatory trope getting so much play. But maybe that’s because a lot of Americans now know better and are seen to be in need of reeducation.