Sunday, March 1, 2009

Locks Are For Honest People

In high school I had an English teacher who was fond of saying “Locks are for honest people.” This odd phrase always raised questions among my fellow students, and the old man delighted in explaining that criminals simply use bolt cutters! Obviously, a lock provides little protection from a criminal armed with bolt cutters. On the other hand, “honest” people—people who might otherwise be tempted into mischief—are easily deterred by a lock. Later in life I figured out that this same principle applies to laws. There are some incredibly honest and sensible people who don’t need the constraint of laws to ensure good behavior, but most of us need things like speed limits and the threat of punishment to keep us at reasonable speeds on the highway and to encourage us to file our taxes.

Recently, it has become clear that this principle should also apply to corporate and financial regulations. Former Federal Reserve Bank Chairman Allan Greenspan famously admitted in the midst of the financial crash that he had been wrong in his assumption that bankers would self-regulate for their own good. Bankers, stockbrokers, mortgage lenders, insurance salesmen, and corporate executives of all stripes, just like other “honest” people need some form of constraint to keep them from slipping into unethical or criminal behavior. And herein lies the great failing of the Republican approach to business and finance.

Republicans tend to view regulations as burdensome constraints that hinder business and stifle economic growth. This view might be substantiated in extreme cases where there is an excess of regulation. (For example, I remember trying to cash a check in India a number of years ago and watching in dismay as nearly a dozen clerks spent a half hour scurrying around making entries by hand in as many different journals before I could receive my money). Unfortunately, politicians are adept at using extreme examples to discredit policies that they don’t like. Reagan very effectively picked on a couple of notable welfare cheats to characterize the entire welfare system as corrupt. But using an exception to promote the opposite is both disingenuous and foolish. Would anyone—even a Republican—use excesses of police violence to suggest that we should have no police at all, or the disgrace of Abu Ghraib as reason to disband the US Army?

But that is exactly the kind of thinking Republicans have applied to all functions of government related to taxes, business, and finance. Their creed is “hands off!” But the result has been catastrophic. Without the constraints of regulation and enforcement, many business executives have slipped over the ethical line to become con men, liars, and cheats. Credit card companies routinely use small print and bait and switch tactics to charge outrageous interest rates and impose unjustifiable fees and penalties. Mortgage brokers lie with impunity, making millions by talking unsophisticated homeowners into ruinous mortgages. CEOs bend accounting principles to create a false appearance of company value. Corporate board members rubber stamp policies and unbelievably excessive executive salaries and bonuses while being paid hundreds of thousands of dollars per year for their “wisdom and oversight.” Corporations, originally licensed strictly to serve the public good, act without conscience and without ramifications as they exploit workers and dump poisons into our rapidly deteriorating environment. Not every businessman is dishonest, of course, but the trend has been depressingly consistent.

Anyone who has watched “It’s a Wonderful Life” remembers how the charming town of Bedford Falls transforms into Pottersville, a horrid, squalid and depressed rural dump, when Mr. Potter, the conniving and miserly businessman, wrests control of the local bank from Jimmy Stewart’s character, George Bailey. It is a shocking scene that brings Bailey to his senses. His former friends, in the desperation of poverty, have become mean spirited drunks, gamblers and prostitutes; it’s only one step away from the wretched slums of Mumbai in "Slumdog Millionaire."

But Pottersville is the extreme Republican vision for America—the logical outcome for a nation where the rich are super rich, and everyone else is destitute and miserable. Is this a vision that any true American can embrace? I don’t think that even most Republicans could stomach such a perversion of the American Dream. Now that the Republican vision has had its day, and has been shown a dismal failure, it is time to redesign the way business and finance operate in America. We must provide sufficient regulations and enforcement to keep the world of business honest. Otherwise, even some “honest” men and women will stretch the rules, lose their moral compass, and eventually take themselves, our country, and the entire planet down the road to ruin.



  1. Hello Peter,

    For the most part I agree but I have to comment on your view of the typical republican view point you espuse. Republicans that I know have some very admitable qualities like a great work ethic and determinism. I don't know any republicans who really want a Potterville! It seems to me that the biggest problem with many republicans is a sort of naiveté about complexities in the world. A great work ethic simply doesn't matter all that much for a single mother working two jobs in which she is woefully underemployed and, even in the best of circumstances, only makes 76 cents to the dollar of what a man would make for the same work. I think there is a myth that hard work always pays off. But, in a culture that standardizes inequality---when this becomes the norm---certain individuales will not get ahead no matter how hard they work. Ignoring these pesky details means that the most vulnerable among us continue to struggle against unfair odds. After all, if we all just work very hard we are the masters of our destinies, right? Things just are not that simple. This is not to say we should not work hard. This is what I liked so much about Obama's inaugural speech. He inspired us to keep trying, against all odds. This is the noble goal with which I think republicans can identify. The difference is that Obama does not seem to be putting his head in the sand about the pragmatic, reality-based constraints so many people face.

  2. Thanks for these excellent observations. It's easy to slip into thinking that the Republican ideology is just a self-serving rich man's way of stealing from the poor, while overlooking the possibility that a noble ideal or two lies at the root of their thinking. But how do we explain the persistent use of dirty tricks and voter disenfranchisement that has marked Republican electoral practices since Nixon's time? This kind of "end justifies the means" thinking undermines even the noblest intention. (And I know that the Democratic party is not without stain in this regard, but on a totally different scale and scope, notwithstanding the overblown rhetoric about ACORN.)--Peter

  3. Good writing, however you're quite a bit off in your assessments.

    Republicans are generally strong advocates of the rule of law, and in favor of persuing justice for cheats, swindlers, con men, thieves, and all kinds of criminals. While we are against excessive regulations which hinder free markets, we also are ardent supporters of robust courts and legal consequences for those who are sleazy and dishonest. In other words, we believe that the main purpose of government is the protection of individual rights, including property rights, against those who would violate them.

    We are against regulations which overstep that limited role(especially those which have become so egregiously involved in our daily lives to redistribute wealth and to socially engineer equality, to attempt to bring about a socialist utopia, etc.), and regulations which wind up violating an individual's right to free enterprise.

    Contrary to what you imply, the primary reason that so many unscrupulous mortgage lenders went hog wild in the housing boom was that liberals forced completely wrong-headed and altruistic regulatory requirements onto the banks and financial entities. They mandated that Wall Street and the entire housing industry become a vast social engineeering scheme, and all of the risky lending and underwriting, the subsidizing of risk through FNMA/FDMC, the bailouts, the privatization of gain along with the public burden of loss was brought about by mainly democrat policies and regulations.

    Wall Street and banks mainly spun out by trying to come up with creative ways to hedge all of the horribly risky and disastrous affirmative-action lending and altruism that they were forced to engage in.

    Once prudent lending standards were basically outlawed by liberals(strict lending requirements such as 20% down payments, sufficient income, etc., were deemed "racist"), what were banks supposed to do? Stay in business by throwing money away on deadbeat ghetto denizens and grifters?

    The whole mess had more to do with lending standards being destroyed by do-gooders, and financial institutions having to adapt to that, than it did with bad actors in the private sector. Sure, there was no shortage(no end, actually)to the bad actors in the private firms, but the main culprits were the liberal democrat politicians trying to win votes among the have nots. Fannie Mae and Freddie Mac were full of government do-gooders making millions for themsleves while publicly posing as champions for the poor and middle class--Franklin Raines, Jamie Gorelick, and others come to mind.

    Once lending standards were lowered, they eventually were destroyed, because banks saw that they could( andd basically had to) pass off the risky and growing riskier loans they were being forced to make onto the GSEs which eagerly snapped them all up and passed them along to the derivatives hustlers and the fraud-mongers at the rating agencies, etc. That became the main game in town, so to speak; where ALL the action was! Any firm which tried to practice traditionally strict lending standards found itself left out of the picture, and had to get into the fray.

    The moral of the story: Altruistic do-gooders with the power of government law enforcement and regulatory authority at their disposal basically destroyed our financial system by making moral hazard mandatory, and then they proceeded to blame those they forced into the entire scheme for the unintended consequences of it all.

  4. Bravo, an adult.