Wednesday, April 08, 2009

Money and politics

The golden rule: He who has the gold makes the rules.
-- popular saying

You hear politicians such as Sen. John McCain speak from time to time about the need to get money out of politics. All that money sloshing around serves as a corrupting influence and stands in the way of honest government, they argue. They are correct in that money corrupts our politics. Where they err, however, is believing that that the two can be separated, for as long as government makes decisions that impact our everyday lives we will attempt to influence it. They are inextricably linked. As evidence I would cite all of recorded history. The monied elites and political leadership are rarely strangers.

It's with this in mind that I read Steven Pearlstein's column today. Pearlstein -- the subject of frequent criticism by this blog -- calls for regulators to save Wall Street from itself and rescue the financial industry from a narcissistic culture that breeds outsized egos and idiocy:
The answer to that problem isn't for Congress to use the tax code to effectively legislate pay caps for Wall Street. In the current climate, however, the only way to beat back such bad ideas is to find some other ways of stopping and reversing the Wall Street arms race on pay.

Of course, an industry that earns so much profit that it can afford to pay multimillion-dollar bonuses to 26-year-old traders also has too much money to lavish on the political process in ways that undermine those who would regulate it. I wouldn't go as far as MIT economist Simon Johnson, who argues in the May Atlantic magazine that the United States has effectively become a banana republic with the Wall Street oligarchy running the show. What is undeniable, however, is that there are regulators here in Washington who have been reluctant to rein in the industry out of fear that they would be thwarted by the White House, the Treasury and key members of Congress acting under pressure from the industry.

It's all well and good for the Goldman Sachs chairman to call for better regulation of the financial industry. But regulators are unlikely to do much better during the next bubble unless we can find better ways to insulate them from Wall Street's outsize political influence.
This is a rather breathtaking amount of naiveté. Pearlstein really thinks that it is somehow possible to separate bureaucrats from the political leadership that watches over them. Regulators, unless they have no interest in their career prospects, take their cues from the top. Woe be to the bureaucrat that defies his political masters. Yet this is Pearlstein's proposed solution to what ails Wall Street.

I suppose the possibilities are infinite once you let slip the bonds of reality.

Update: I emailed Pearlstein to say how naive I thought his column was. He writes back:
There are regulators who, by law or tradition, are more removed from political influence than others.
Not a lot to respond to. However, if there are already removed from political influence then why were so many scared of the White House, Congress, Treasury, etc.? In addition, I would submit that it is not at all obvious if removal of political influence is entirely desirable as it provides a check on bureaucrats run amok.


Josh said...

It wasn't / isn't Wall Street that prevent Regulators from acting during bubbles, it's fear of populist reprisal.

Despite all the rhetoric the line between Main Street and Wall Street is more blurred than ever.

What President or Congress is going to tell the public that we need to slow the growth of their 401(k)s, make it more expensive for businesses and individuals to get credit, and that a house is a luxury and a privilege and not a right?

This has nothing to do with Wall Street influencing government. It's all about government leaders using the myth of unlimited and unending growth as an election tool and lacking the courage to push short term discomfort on the public for long term benefit.

Colin said...

A lot of truth in that comment, although I think that the emphasis on easy growth manifests itself more in the management of the dollar than regulation of Wall St.