After the Enron crisis, the crisis in which independent accounting firms turned out to be not so independent, when filings certifying truthfulness helped to perpetuate massive frauds, I came across a suggestion on how to prevent future Enrons. It was market based, involved few additional rules, was simple and easy to understand.
The source of the Enron policy issue was that there was no independence in the accounting firms hired by Enron, because they were ... well ... hired by Enron. Negative reports might make other large corporations reluctant to hire those same accounting firms. Who wants to hire their own nanny if that nanny has a stern reputation?
The suggested solution was to require some minor, but substantial, part of any publicly offered stock ownership be independently insured. Accounting firms would then be hired by the insurance company. The insurance companies would have to meet some financial requirements of stability and substance. No shadow companies that can meet requirements and then go out of business.
The idea was to replace the too cozy relationship between public accounting and private management with a more antagonistic relationship in which any funny business would be exposed. It would be exposed because it would result in loss to the insurance company if it wasn't.
The idea never went anywhere, of course. It probably never rose above the radar to any consideration at all.
Years later, the 2007 financial crash threw us into a deep and dangerous economic vortex. This generated a massive effort to save financial institutions that were "too big to fail." President Bush explained his point of view in a CNN interview:
Well, I have obviously made a decision to make sure the economy doesn’t collapse. I’ve abandoned free market principles to save the free market system. I think when people review what’s taken place in the last six months, uh, and put it all in one, in one, you know, in one package, they’re realize how significantly we have moved.
Vietnamics: "I’ve abandoned free market principles to save the free market system."
After that, a lot of thought went into financial rules intended to prevent the practices that led to the crisis, practices ranging from reckless endangerment to outright fraud. A fair report of maneuvers by one company, Washington Mutual, leading up to the collapse can be found in Kirsten Grind's The Lost Bank. At the source of a lot of the deadly mischief was the knowledge that the feds would have no choice but to step in if things went wrong.
Unaddressed has been the source of the problem: too-big-to-fail. The recent debacle at J.P. Morgan is defended by conservatives on the basis that the corporation was big enough to survive without government help. They ignore the fact that elected officials, if they chose to act responsibly, would never have let the company go down. Couldn't afford to.
So how do we keep too-big-to-fail from happening? The Volcker rule, forcing banks to conform to some safety standards if they carry federally insured deposits, could be augmented. Institutions that grow past a certain point could be denied the ability to associate themselves with federally insured deposits. You want to deposit your funds with a mega-bank? Go for it. But any losses will be your own. Presumably, no financial institution associated with any ordinary banking would grow past that point.
So we have two simple, easy to understand proposals that are safe and uncomplicated:
Require insurance and auditing of public stock offerings.
- Limit federal insurance to banking institutions that are not too big to fail.
Either or both proposals, or some variation, could be proposed by the Obama administration. But it's safe to predict the administration won't do it. Want to know why?
Soon after Obama took office, the administration offered a plan that originated in the conservative Heritage Foundation and had been sponsored in legislation by 19 Republicans including Orrin Hatch, Charles Grassley, Robert Bennett, and Christopher Bond. It was market based and had been tried successfully on a state level.
As soon as President Obama endorsed it, those same Republicans denounced it, and a campaign was started labeling the conservative proposals as a socialistic expansion of government. We know the plan today as Obamacare.
The reason two new reasonable, market oriented, self-regulating reforms will never see the light of day is that history has shown us exactly what will happen as soon as the Obama administration proposes them.
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