The Gold Standard | LBJ ‘paid’ more

Bloomberg came up with an interesting observation on minimum wages in the US, adjusted for inflation, being lower than they were during the time of Lyndon B. Johnson. It wrote an editorial recommending an increase. That intellectual openness has to be applauded. It is all right to harp on efficiency and how a raise in minimum wages discourages hiring, etc. Beyond certain limits, they sound hollow and merely provide cover for capitalists’ greed.  Once certain well-accepted social norms of fairness and reasonableness are crossed, capitalism becomes indistinguishable from robbery. So, Bloomberg deserves our praise for noticing an extreme deviation and writing about correcting it.

Why is that so in America? If you are able to connect the dots, here are two of them. One is by Roger Lowenstein who has penned a detailed note on how the industry is lobbying against rules to make the world safe from derivatives and their trading of it. These two paragraphs (in this long article) caught my eye:

It is hard to see why industry would attempt an end run around the rulemaking — save that it wants to protect one of the most lucrative and highly concentrated sectors on Wall Street. The House bills are so specific they are almost comical. (Emphasis mine). It is doubtful that members even understand what they are voting on.

This legislative pre-emption recalls a similar interference by Congress in 1999-2000, when Arthur Levitt, then chairman of the SEC, sought to enforce higher standards on corporate auditors. Congress threatened to strip the agency of its power to regulate audits; Levitt was forced to compromise. Less than a year later, America was hit by a wave of corporate accounting scandals, including that of Enron Corp.

The second one is by professors Thomas Cooley and Kim Schoenholtz, at New York University’s Stern School of Business. They write about ‘shape-shifting’ by financial institutions – a form of regulatory arbitrage. Deutsche Bank has de-linked its investment bank from the Bank holding company to avoid the higher capital requirements mandated by the Dodd-Frank Act.

Their last paragarphs make for sad reading:

The most straightforward solution to this problem is to regulate financial instruments and markets (say, through collateral and margin requirements), rather than just regulating institutions. Another is to promote transparency and infrastructure that empower greater market discipline. Dodd- Frank makes some progress along these lines by shifting derivatives trading to clearinghouses. And the Fed has pushed for years to reduce the systemic risks emanating from the critical market for collateralized short-term funds (repurchase agreements).

But not all systemic risks are easily amenable to this approach. History shows that increased regulation of instruments and markets also will create incentives for innovations that avoid it. Such innovations may be quite profitable, even as they undermine efforts to limit systemic risks.

Have the great financial crisis, the extraordinary policy responses, the deepest postwar recession and the dismal recovery altered these historical tendencies? Not if Deutsche Bank and other foreign banks’ version of regulatory arbitrage proves representative.

But, banks are not the only ones who have not altered their behaviour yet. There is no remorse in other quarters too.


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.