Obama says regulation needs to catch up with financial markets. Some might call that putting lipstick on a pig.
Unfortunately, the problem is far more fundamental than a matter of better disclosure rules. The problem is the irrational means by which we allocate hard won savings to genuinely productive investment.
In fact, the response of regulators, even Democrats in New York, has been to weaken regulations in order to facilitate rescues. AIG, the giant teetering insurance company, was allowed to break through internal fire walls to steal $20 billion from its stable business lines to prop up its crashing financial products division!
The Wall Street Journal reported:
In New York, where AIG is based, Gov. David Paterson announced Monday that state officials are working with the insurer on a plan that would allow the firm to, in effect, loan itself $20 billion, by borrowing against its assets. The state would allow the company to shift assets that are subject to tight regulation in order to give the company better liquidity in the short term.
Labor union trustees on big pension funds have been agitating for a decade or more to improve corporate social responsibility and have largely been ignored while Wall Street continued to funnel worker savings into ever more complex, imaginative and, as it turns out, fictitious forms of investment.
Warren Buffett warned years ago that the new complex financial instruments were weapons of mass destruction. Now, when we find real WMD’s we try to get them disarmed, we don’t just ask for better training for those who intend to use them.
Rescuing the economy from this situation will require a lot more than better rules for ratings agencies. To use an even more graphic metaphor: to suggest this crisis is a matter of regulation is like medieval “doctors” using “bleeding” to rid the body of damaging spirits.
What will be required here is basic structural change on a scale not seen since the New Deal: establishing publicly managed investment entities with democratically elected trustees who can make meaningful demands on businesses for socially responsible technologies.