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Adam Smith on Wall Street

As independent investment banks began to fold with the gigantic crashing sound you heard last week, investment banks Morgan Stanley and Goldman Sachs raced to become commercial banks under safer, stolid commercial banking rules.

. . .Wall Street as we've known it for decades has ceased to exist. Six months ago there were five major investment banks. Two - Lehman Brothers and Bear Stearns - have failed, Merrill Lynch is selling itself to Bank of America, and now the last two are becoming commercial banks. Adam Smith, that great market disciplinarian, is punishing excesses and remaking American finance long before Congress can get into the act.

We have to wonder whether American taxpayers should be bailing out companies who did not keep transparent accounts, and lacked the wit to understand or were too greedy to admit that they were bundling and selling worthless housing loans. That's on the private side, at least as far as I understand it.

On the public side, Fannie and Freddie pushed loans to people they called NINJAs, people who lacked jobs, income or a downpayment, falsified their accounts and then pushed the loan bundles to Wall Street. Fannie and Freddie CEOs should return their stolen bonuses - in the hundreds of $ millions - to taxpayers.

Some say this is a problem of not enough regulations and regulators.

There has indeed been deregulation in our economy - in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few - and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.

Adam Smith approved of bringing services and products at less cost to citizens, a sentiment with which we would all, I daresay, agree. He loathed monopolies, whether belonging to the government or business.

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs [Fannie and Freddie] from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.

As Adam Smith observed about government ministers -

It is the highest impertinence and presumption in ministers to pretend to watch over the economy of private people, and to restrain their expense. They are themselves always, and without any exception, the greatest spendthrifts in the society.
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Comments (2)

Sandra Hurt-Norris:

I have been watching Paulson & Bernanke testify today and the main statement that struck me was they don't know if this will work. I immediately emailed my senator and asked him to take his time, don't let them rush him into a decision. I also pleaded with him to vote against any earmarks that probably will magically attach to a this bill. I almost would rather take my chances in a recession than bail these morons out.

kate b:

Watching McCain and Obama on the news last night it is clear that they have grave concerns that the present make shift solution will be adequate. They must also be in two minds whether they actually now want to be President at all.

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