Posted by WARREN MOSLER on April 25th, 2010
How to fight back against Wall Street
Much like we killed the buffalo to defeat the American Indians, we can work to tame Wall Street by working to reduce its food supply. And a large part of that food supply is the US pension system. Created and sustained by the innocent fraud that savings funds investment in a ‘loans create deposits’ world, the powerful attraction of being able to accumulate ‘savings’ on a pre-tax basis has generated nearly $20 trillion in US pension assets in thousands of scattered plans, from the giant State retirement funds to the small corporate pension funds, to the various smaller individual retirement funds.
Before I get to the way we can eliminate these bloated whales being eaten alive by the sharks, let me first suggest a few ways to whales from becoming shark food. The first is to get back to ‘narrow investing’ and public purpose by creating a list of investments deemed legal for any government supported pension funds. And ‘government supported’ would include any funds that are in any way tax advantaged. Legal investments would be investments that are in line with further public purpose. Not a lot comes to mind. If the public purpose is safety for the investors government securities would be appropriate, as government securities are functionally government guaranteed annuities. New issue equities might make sense if portfolio managers were required to be sufficiently educated and tested to make sure they are up for the responsibility of deciding where new real investment is best directed. But that’s a major and impractical undertaking. And there is no public purpose in simply trading new issues for relatively short term gain with no longer term stake in the merits of the underlying business. Nor is there any public purpose to investing in the secondary equity markets. In fact, with the rules and corporate governance stacked against shareholders, there is public purpose to not investing in those markets. Nor are these my first choice for the institutions I’d want investing in corporate bonds. It makes more sense to utilize the 8,000 regulated and supervised Fed member banks, all of which already specialize in credit analysis. If there is public purpose to buying corporate bonds, better the banks perform that function and not the pension funds.
So it looks like the only investments that make sense are government securities. The problem there, however, is I’m also advocating the government stop issuing securities. So that would mean the only investments for pension funds that make sense from a public purpose point of view are insured, overnight bank deposits. And that would go a long way towards taking away Wall Street’s food supply, thereby greatly reducing the troubling kinds of activities that we’ve been witnessing. This drastic reduction in financial sector activity would make regulation and supervision of what’s left a lot less complex and far more effective, and at the same time work to stabilize the financial aspects of the real economy.
Longer term, with the recognition that we don’t need savings to have money for investment, we can change the tax laws that are fostering these problematic pools of savings, and let them wind down over time.
Racing to the bottom
Government is about public infrastructure for further public purpose. That includes the usual suspects such as the military and the legal system, but Federal public infrastructure also includes regulation to stop what are called ‘races to the bottom,’ which usually involve what are known as ‘fallacies of composition.’ The textbook example is the football game, where if one person stands up he can see better, but if all stand up not only is nothing is gained, and no one gets to sit and watch. Allowing anyone to stand to see better is what creates that race to the bottom, where all become worse off. A ‘no standing’ rule would be a regulation that supports the public purpose of preventing this race to the bottom.
Another example is pollution control. With no Federal regulation, the States find themselves in a race to the bottom where the State that allows the most pollution gets the most business. The need to attract business drives all the States to continuously lower their pollution standards resulting in minimal regulation and unthinkable national pollution. Again, Federal regulation that sets national minimum standards is what it takes to prevent this race to the bottom.
Insurance regulation has been at the State level, which was deemed too lax only after the failure of AIG, which was the end result of a race to the bottom the Federal Government should have addressed long ago. Discussion has now begun regarding national insurance regulatory standards.