Sunday, January 31, 2010

A Chill Wind from Davos Blows onto Wall Street

The annual meeting of the World Economic Forum in Davos, Switzerland is a gathering of the world's business and political elites that inflames the paranoia of the gun-cleaning, nonperishable food stocking, cabin on a ridge dwelling crowd. High ranking people with easily recognized names schmooze, eat, drink--and talk about what? It's not entirely clear. Imaginations step in to fill the informational void. Conspiracies are avidly inferred. Entrenchment of the well-to-do is strongly suspected. Speculation abounds that ordinary people are mocked and their interests laughingly sold down the river.

But perhaps not this year. CNBC reports that the big banks were told by government figures that more regulation was on the way, whether or not they liked it. Evidently, the bankers didn't even bother to protest, seemingly recognizing that they've overstepped by recovering so exuberantly from last year's crisis with the benefit of government bailouts, while everyone else continues to struggle with economic stagnation and high unemployment.

They probably thought they had things taken care of. Going back to the 2008 Presidential election, Wall Streeters, led by the folks at Goldman Sachs, contributed more to Barack Obama than John McCain. And the difference wasn't small. Of course, you didn't need a Wharton MBA quality intellect to figure out that Barack Obama would win. And Wall Street, an industry kept afloat by government bailouts, obviously had to side with the winner. Since Obama was sworn in, Wall Street lobbyists have quietly but furiously pushed back against the various proposals to reform financial regulation, with considerable success. A couple of months ago, only modest changes seemed likely. The big banks were surely breathing easier.

Then, the Republicans screwed everything up. They slipped into Massachusetts in the dead of night and ambushed a somnolent Democrat in the special election for Ted Kennedy's replacement. Having lost in a flash his best chance to reform the health insurance mess, President Obama went with the flow and joined in the populist outrage over big bank bailouts. He immediately rehabilitated Paul Volcker, the former Chairman of the Fed who was being confined to a re-education camp for liberals, and ordered column left march. The ghost of the Glass-Steagall Act was seen wandering the streets of lower Manhattan during market trading hours.

Things got worse in Davos. Reportedly, Rep. Barney Frank (D-Mass.), not exactly a minor recipient of campaign contributions from the financial services industry, was vocal among the eminent about the imminence of increased regulation. In step with him were several high ranking European governmental officials. The message was that regulators would work across international borders to prevent financial institutions from pulling . . . things . . . in one country that they couldn't do in other countries. There would be no exit from increased regulation.

With the Davos 2010 manifesto beginning with "regulators of the world, unite," all of Wall Street's careful political planning in 2008 seems to have been for naught. Stricter rules are coming down the pike. And the Street has nowhere to go, since the Republicans started the whole thing with their victory in Massachusetts. Maybe the moral of the story is hell hath no fury like a political party scorned. Today's populist anger is like flood waters overwhelming a dam, and some Republican members of Congress are trying to catch the insurgent wave. The erstwhile party of big business won't make a united stand to protect Wall Street.

There is a lesson here for the financial services community. The free market ethic of the 1980s and 1990s is dead and gone, crushed by hundreds of billions of dollars of undocumented, unsupported, unjustified and plain old stupid mortgage loans that impelled the largest government intervention ever in America's financial system. The polity no longer believes that what's good for corporate profits is good for America. An industry sometimes can, through a well-funded lobbying campaign, slip quietly through the weed-infested, brackish, swamp waters of political Washington and fix things so its interests appear protected. But not when its survival requires an enormous helping--and then seconds and thirds--of the nation's resources. You ultimately can't ask the middle class many in a democracy to serve the interests of a privileged few. When the electorate believes it's been ripped off, it has the means to take action. Even when the most powerful corporations are concerned. No business in a democracy is a profit center unto itself. To survive and thrive, it must find a way to fit into and serve the needs of the larger community, giving as well as taking.

We've been here before. The industrialization and cartelization of America in the 19th century led to populism at the turn of the 20th century. The ensuing fifty years of political struggle witnessed the creation of the federal regulatory structure we now have, along with unemployment compensation, Social Security and the other social welfare programs that form today's safety net. Although the business community slowed the process of change, the electorate eventually had its way. It will again. Free market theoreticians may sputter and fume as the perfection of their markets is muddied by politicians and bureaucrats. But free markets as they exist in the real world tend toward, and eventually wallow in, excess. Lacking the ability to restrain themselves, yet with their excess inflicting massive collateral risk and damage on society, they sooner or later invite government regulation. Thus it has been, and thus it is now.

We should also recall that the 20th Century was, on the whole, a time of great economic growth and rising prosperity. The increase in government regulation and participation in the economy eased political conflict, improved education, infrastructure, communications and transportation, and enhanced the legitimacy of the status quo. Calls for radical change lost their appeal. The social balance and stability achieved by the growth of government enhanced business opportunities and facilitated investment. Profits are less predictable when a lot of people wave pitchforks at corporate headquarters. The truth is, increased regulation is for Wall Street's own good.

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