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It's Not about Personnel; It's about Power

September 16, 2010

Tags Big GovernmentFinancial MarketsLegal System

Elizabeth Warren

Market analysts have been trying to predict President Obama's pick to head the newly created Consumer Financial Protection Bureau. Earlier this week Obama and other administration officials hinted that the spot would be filled by Elizabeth Warren, a hero to progressive activists but anathema to the banking industry. (As of Wednesday evening, Warren had been confirmed as a "special adviser" though her ultimate status still remained up in the air.) The whole episode underscores the profound difference between adversarial government operations and peaceful, win-win market activities.

The Fans and Foes of Elizabeth Warren

A Reuters article summarizes the tussle over Warren:

U.S. President Barack Obama on Tuesday edged closer to naming Wall Street critic Elizabeth Warren as his new top consumer financial watchdog — but with lawmakers split over how he should do it. Obama is deciding whether to pick Warren, an outspoken consumer advocate backed by liberals but reviled by bankers, as interim chief of the new consumer financial protection agency or risk a full-blown Senate confirmation battle.

However he does it, the choice of Warren, which could be announced as early as this week, would set up a messy fight with Republicans in the heat of the November congressional election campaign. … Warren is regarded as the top candidate to head the Consumer Financial Protection Bureau with sweeping powers to write and enforce new regulations covering mortgages, credit cards and other financial products. "She's obviously in the mix," said White House spokesman Bill Burton, acknowledging that an interim appointment is among Obama's options. He said an announcement would come very soon but no news was expected on Tuesday.

Warren, 61, is a Harvard law professor and bankruptcy expert who has served as chairwoman of the Congressional Oversight Panel, a watchdog for the U.S. financial bailout program. She is a hero to liberal activists and consumer groups for taking on Wall Street excesses seen as a root cause of the global financial crisis that drove the United States into its worst recession since the Great Depression of the 1930s. But her appointment is fiercely opposed by the financial industry and many Republicans who contend she would take a heavy-handed regulatory approach that would hurt the profits and global competitiveness of banks and other financial firms. "It opens Pandora's Box," said Marshall Front, chairman of the Chicago-based investment firm Front Barnett Associates LLC. "There's going to be a lot of fury over this. I see this as being very in the face of business and it's not going to be taken well."

Don't Fall for the Popular Narrative

On the one hand, it's silly to even get sucked into the official press narrative. The very idea that the Obama administration — which named one of the architects of the TARP bailouts, then–New York Fed president Timothy Geithner as Treasury Secretary — will actually get tough with the fat cats on Wall Street is absurd.

Whether or not Elizabeth Warren fills the new regulatory position, we can be sure that the government's new powers will be used to stifle competition and further enrich the politically connected bankers at the expense of the general public. Idealistic progressives will be as disappointed with Barack Obama on "financial reform" as they have been on the issues of civil liberties and "healthcare reform."

"Investors typically don't brace themselves for horrible personnel decisions that will send stock prices plummeting, the way bank stocks tremble whenever more news about Elizabeth Warren comes on the scene."

By focusing on the "controversial" pick of Warren, the government and its media accomplices subtly shift the fulcrum of the debate. People aren't questioning whether the government should be seizing vast new powers to regulate the financial markets, even though its last expansion — in the wake of the Enron and other accounting scandals — did nothing to prevent the shady practices of the housing bubble years.

Instead of that substantive and crucial debate, Americans are led to fret about which person will head the new agency. American children learn in civics classes that this country is a land of laws, not men. Yet the financial press disproves that myth daily.

In fact, as the Reuters article demonstrates, the spectrum of debate is actually even narrower. Rather than listing several candidates for the job, and discussing their pros and cons, we are supposed to get worked up over whether Obama will appoint Warren on an interim basis (which can last up to five years!) or whether he will go through the conventional channels and subject her to a confirmation process. Thus the media skillfully distract the public away from the important issues, and entertain them with inconsequential fluff.

This Wouldn't Happen in a Free Market

It's important to note that there is nothing like this in the free market. Investors typically don't brace themselves for horrible personnel decisions that will send stock prices plummeting, the way bank stocks tremble whenever more news about Elizabeth Warren comes on the scene.

It's true that stock prices may fall due to personnel decisions in the private sector, but even here it's usually in a "positive" way. For example, if a company lures away an important executive from its competitor, that may drive down the stock price of the company losing the skilled employee. However, the move will probably boost the stock price of the acquiring company, so that the industry as a whole doesn't suffer a loss.

Furthermore, even if we focus on the company with the falling price, the reason is that a productive and useful individual is leaving it. This is the opposite of the situation investors face with Elizabeth Warren. Here, they are worried about her starting to work, not about her stopping. Investors are worried that she will "do her job," and that she will prove destructive, not productive.

Defenders of the Obama administration may object to my analysis, arguing that the government needs to provide a regulatory framework, and that of course the affected industries will chafe under the rules. But surely, the Obama defender would say, this new "referee" — whether in the form of Elizabeth Warren or someone else — is providing a benefit to society in general.

Yet this is wrong. There are plenty of "regulatory" agents in the private marketplace, and yet none of them is as adversarial and feared as the government's new agent will be. For example, professional sports leagues employ referees to enforce the rules of the game. It's true, the owner and fans of, say, the New York Knicks might be outraged at a particular call in a critical playoff game. But going into the big game, the analysts on ESPN never dwell on the identities of the referees. Such an analysis would be unheard of, because it's in the interest of the NBA to ensure that the fans think the games are fair. Any referee who consistently made bad calls would lose his job.

There are hosts of other, more mundane examples. An insurance company might send inspectors to verify that a corporate client is following contractually specified procedures, such as maintaining sprinkler systems and smoke detectors. These inspectors would of course be viewed as outsiders by the corporate employees, but the higher-level management would know that they had to keep the inspectors happy because it is important to keep their fire insurance premiums down. For its part, the insurance company would only insist upon precautions that actually made sense economically, because it wouldn't want to lose the corporate client to a rival insurer.


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The government creates "jobs" that are destructive. Because there is no feedback of profit and loss, the only thing that can eventually end a harmful bureaucracy is a massive public outcry. In the meantime, private citizens quake in their boots over the zeal of the person who will end up wielding such tremendous and arbitrary power over their lives and businesses.

In contrast, the peaceful market economy rewards excellence. People who wield influence in the private sector achieve their positions because they have demonstrated proficiency, and if they make mistakes they will eventually be fired. Even in situations where there is an apparently adversarial relationship, these appearances are only superficial. Because all relationships in the market are voluntary, even seemingly hostile interactions are part of a larger association that is itself friendly and mutually beneficial.

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