dubious.biz(ness)

I started to think a bit more about the banking and shadow banking system and I wanted to make a metaphor. Being a Kentucky boy, I started to try to form it around a thoroughbred track, because at a track there are a ton of ways to make money. The idea would be that the “betters” are a mix of the average joes, handicappers (hedge funds), the track facilities (government)… anyway it got too complex and obscured the real point.

But I will resurrect a stubby version of the race track metaphor for this thought: in horse racing you have “horse people” and “regular people”. The regular people are the major source of revenue into the system, and it generally gets distributed around to the “horse people”, because one way or another they know more about how to make money at a track. And more importantly, if it was only “horse people”, it would be a closed system and the “horse people” would just be trading money amongst themselves. The regular people are the influx of cash.

But you certainly don’t let the regular people make most of the rules and system at the horse track. You let the horse people do it. The jockeys, owners, the track itself, the bookies, etc. They all design the whole system because they know a hell of a lot more about how it works and more importantly, they’re most invested in the system. So it makes sense that those who know make the rules.

But the real authority doesn’t come from their expertise, but from their investment. If some other group of people (say, hot dog stand owners) were more invested in it, you’d expect that the rules would suit them more than anyone else. But hot dog stand owners don’t determine how far the horses run and what sorts of bets you can make. They determine how much your hot dog costs.

In our current banking system, we delegate nearly all authority to the “bank people” who know a lot about banks. However, we, as a whole, are actually the most invested. They are the hot dog stand owners in the metaphor. They should only determine the fees on hot dogs, but instead we’re letting them determine what sorts of loans can be made, who can intermediate, how that intermediation is handled, how those loans are accounted for, who gets paid the most and so on.

The crux of the problem is, we treat the banking system like a horse track, and it isn’t. It’s not a playpen for bankers. It is a common facility for connecting people with money and people who need money in the economy. People, as in regular people. So a technocratic approach has failed because the technocrats write the rules in their favor. And we are about to get back on the same roller coaster again. We’re not shining sunshine on the banking system, and we’re not simplifying it and we’re not establishing principles.

We are willing to give up simplicity if we “get out of this crisis in return”. I disagree vehemently. The banking system is not a race track, it is a common facility. We can let people make bets to win or lose but as we stray further from that easy to understand system we should stop listening to the technocrats and start tracking the money. When the money goes to a banker’s account disproportionately, something is vastly wrong.

Right now, Timothy Geithner is creating a banker’s dream plan. We previously had very few rules at all, but now we’re letting the banks write the rulebook so its in their favor. And they will return to profit. But frankly who gives a damn whether banks make a profit? Banks do. Banks must run on a narrow set of rails called common sense and public benefit. If the real economy is growing, banks should get a share. If the real economy is contracting in any way, banks should be punished severely. If the real economy is contracting and the banks are at fault, the banks should expect to have every bit of profit for the past several years clawed back.

Now before we raise our pitchforks: yes the banks should receive government investment because they have far too much debt. And no, government investment should not carry conditions. Instead a new framework for banking must be made with thought as to the public good and common sense. Banks must be bounded on all sides, as should anything that acts like a bank. If people want to make billions, they should go into any discipline other than banking. Bankers should again behave as facilitators to the public’s capital needs. We should act immediately and harshly to quash any hangers-on who still think that by creating a system in their own favor, whether by government assistance or by creating instruments so complex that themselves cannot responsibly wield them.

Simply put, the people most invested should run the show. At the horse track, that’s the horse people. We’re just there for fun. In the banking system, shadow banking or not, that is the public and corporations whose investment and capital needs are fulfilled.

Or, Travails in the Modern Political System…

Watching Obama and the democrats struggle to get a stimulus bill kills the post-election and inaugural euphoria and reminds me of what it is like trying to get politicians to do what I want. You may not know it but for a short while in 2004, I was on Kentucky’s Capitol Hill in Frankfort nearly every day. I was trying the impossible: I wanted to convince our legislature to do something in their citizen’s best long-term interest while two huge corporations (BellSouth and Alltel at the time) were trying to convince the legislature to make things far more convenient for them while lowering the likelihood that there would ever be consumer choice in broadband by stacking the cards in favor of the massive telephone companies. The story is a good one, and probably worth telling some other time.

What I’m most taken by today is how it was to talk to the legislature and try to get them to go my way. What strikes me as most memorable now is how absolutely slimy most politicians are. I have known many politicians via family since I was little. They have, without exception, struck me as friendly, gracious guys who are always jovial, always have good timing, sometimes modest, often appropriately inappropriate, and most of all “grandpa-ish”. Lively, earthy, and kind: definitely grandpa. Another thing: without exception, they are all old white men, of significant means, often ex-lawyers, and ex-farmers.

So you can imagine, seeing these guys, you start to talk and you instantly feel like you can lay all your troubles down at their feet. And that’s what you end up doing. If you’re walking, within a second they’ve got their hand across your back, helping you share the burden. If you’re sitting, they’re leaning forward listening directly to you. In the hands of a good politician, you know that you are important, you are making a difference at the highest possible level, and you are a smart, resourceful citizen. Politicians always smile and nod, interjecting with important supporting points, sighs of frustration at your frustration and vociferous agreement with your overall position. During the short time I tried to stop the phone companies from destroying cooperation clauses in state law, I have left many wood-paneled offices of politicians. I never left with any doubt. They were behind me 100%. Rookie mistake.

What didn’t I do? I didn’t seal the deal. I never got them to answer that they would support me. In politics, you can make all the other noises, but if you don’t quack you aren’t a duck. Nobody, it turned out, supported our side. Why? Well they were in the pockets of the phone company lobby which spends billions to make sure that their oligopoly stayed that way. They have a number of tools at their disposal: their own corporate lobbies, an association that lobbies for them, and most potent of all, a telecommunications workers union that lobbies on their behalf. For everyone one visit from me or one of my competitors, they received four or five visits from the arms of the telecommunications empire the Bells created. More importantly, I wasn’t carrying checks for campaign donations or promises of voting blocs from endorsements, which they were.

So it ended how it did. But what I will never forget that these guys, some of whom I had known my entire life, would do everything short of lying to me to make me feel good and then after “weighing” the arguments in private, they voted unanimously to pass this bill out of committee. There was never any doubt in their minds. I was for the best thing for competition, for the state, and for the long-run. But I was worth $0 and one vote. So I wasn’t even worth disagreeing with because there wasn’t even a bridge to ceremonially burn. Despite being on the right side in our minds and, I believe, the minds of the legislators I visited for days on end, I and my ilk got what was coming to us: nothing.

The stimulus bill was caught the same crap this week. It is because politics at its natural peak of evolution is such a complicated calculation of money, power, votes, influence, and party platforms that the outcome is a foregone conclusion. Everyone does exactly what is in their best interest and no one, and I mean no one’s interests are best served. It is an offense to democracy that we are in the state that we are. The stimulus bill is a horrible mess. All those expecting Obama to use his mandate to steamroll through a sensible and responsible bill, good luck. Every vote that he needs to get this passed comes from politician. A $1 trillion dollar omnibus stimulus bill is a blank check. What are we getting for this? We’re getting guys reelected. How much is that worth? Well about $1 trillion dollars. These guys know that their performance is measured by what they bring back to their donors, so they’re bringing it all home.

And what of the Republicans? Well, they’re not in power, but their influence could have made this bill sensible. But the cost of getting one, just ONE Republican to switch sides is so high that the party considers it high treason to jump ship. Any Republican caught even contemplating a vote (in exchange for money to their district as well as some leeway on provisions) would be castrated on the spot by the party whip. So having a weakened Republican party has hurt the nation because the only votes left to get are the ones from the dems, and they can basically write their own ticket.

But don’t mistake this for high political theatre. No, this is dead serious business. These guys are operators and manipulators who have made it to the highest levels. Every single one of them could get oil from gold nuggets and comparatively a constituent is an easy mark. Next to a Congressman, the guys in the Kentucky Legislature are small fries. And the lobbyists in Washington, dear God, if they weren’t in it for the power any of them could make their first billion from selling Mary Kay in the greater DC area.

Plummeting back into reality after thinking that things could change, the whole episode with the bag of cats that is Congress and the stimulus bill makes me realize that it’s a continual, despicable calculation of who’s my friend and who’s my enemy. And my enemy’s enemy’s friends… well they’re mine too. At this point, I honestly believe that the solution is to wipe out the major source of revenue: campaign contributions, to zero the playing field. If these guys were just playing for votes without massive media boosts that campaign donations provide, the game would still be as dirty but at least it wouldn’t be hog wrestling in a hurricane.

The moment that lawmakers are forced to serve the nation’s best interests, the moment that their ticket to ride isn’t attached to serving the needs of the (rich) few over the many, that’s when we’ll see change. More than a stimulus bill, more than righting the wrongs of the Bush era, if Obama could produce these reforms, he’d have a real spot in the books. But remember again that the opponents of the bill would be exactly those who need to pass it before he can sign it. And so long as that happens, despots will continue to play the old game.