Thursday, October 02, 2008

Captured Regulators and Retirement

I went to Patrick Byrne's Deep Capture presentation at the University of Utah. Sadly, there wasn't a very big crowd. Considering that the financial crisis is the defining event of 2008, I was students lined up to learn about the problems in the market.

The part of the presentation that got the biggest approval came when Mr. Byrne voiced his opposition to privatizing Social Security. Patrick had a sound argument: He recognized that the capture of the regulatory regime puts all investments in jeopardy. Privatizing Social Security would have done little more than to let the theives running brokerage firms and hedge funds steal the retirement investments of the masses.

The audience applauded thinking that this was proof of the soundness of the Social Security system.

The audience failed to realize that, with the markets captured, the social security system doesn't have much of a future either. Our retirement is held by a dysfunctional government with $10 trillion in debt.

While I agree that we should not privatize Social Security while the regulatory regime is captured by brokers and hedge funds, I wish to point out that capture of the regulatory system does not justify social security. Nor does it mean that Social Security is somehow secure cradled in the arms of a corruptible Federal Government.

Social Security depends on taxing the market. The capture of the regulatory regime of the market puts its funding at risk, just as every company foolish enough to trade in bank securities or that allow their shares traded through the NYSE, AMEX or NASDAQ is at risk.

Quite frankly, I think one can make the reverse argument. It was the creation of social security and the massive government reinsurance like FannieMae and FreddieMac in the New Deal that created a regulatory regime susceptible to capture. While creating these government backed reinsurance schemes and safety nets, the Feds systematically swept aside all of the independent efforts made by investors to protect their assets from corrupt brokers and banks.

The big alphabet soup of massive regulatory agencies created by FDR set up our nation for one massive regulatory capture. The question simply which group will walk away with the totalitarian prize, a fascist style Skull and Bones (AKA GW) type group, or a populist Chicago Mob (AKA BO).

The combination of safety net and re-insurance created a cultural climate where most Americans think that small businesses and small investors deserve to lose in the market ... and that government will step in and save the deserving people every so often when the playing of corporate thugs gets too rough.

Mr. Byrne is correct that we should not privatize social security when the market is captured by rogue brokerages, a broken exchange system and regulatory thugs. This observation in and of itself does not justify Social Security. The horrific damage done through the capture of the mortgage and brokerage segment show that this whole game of gigantic quasi government programs to dominate the market create a systemic fault in the economy. The Feds are some $10 trillion in debt. The day China calls in its loans and says no more, the precious social security checks will stop.

1 comment:

Scott Hinrichs said...

It's amazing that students that will pay large chunks of their income into Social Security without much prospect of receiving SS benefits would applaud this argument.

We are on the cusp of doing a back-to-the-future on FDR's massive expansion of the federal leviathan, since it is looking increasingly like ineffective Republicans won't even be able to muster enough senate seats to filibuster. The other time this happened was when we got Johnson's Great Society expansion. Get ready for the Obama expansion. I'm sure they'll come up with a cute term for it.