Like School Reform, At This Point Financial Reform May Be A Fool’s Errand

In my previous post, I repeated my thought experiment of reinventing the school system from the ground up, leaving past deals, favors, patterns and privileges behind. Creating alternatives that were less costly and better for teachers, parents and students. But what do I suggest for the existing school system? Reform? No.

School reform has been defeated by the teacher’s union in New York and places like it, and by those who want to cut funding for education to keep taxes down elsewhere.   In part due to soaring pension costs, the result of past pension increases in some place and underfunding in others. It’s time to face it. The idea that people had a right to expect more from the education system in exchange for more funding?   In New York they took the funding, revolted against expectations, and now demand even more funding.   The right alternative is to stop trying, stop lying and pursue alternatives in entirely new organizations. In this post I intend to extend that concept to New York City’s leading industry: finance.

More than 15 years ago, in response to a long list of scandals on Wall Street in the late 1990s (Enron, Worldcom, etc.), a series of reforms were enacted to “restore faith in the markets.”   The effort was successful. Wall Street remained as corrupt as before, but people nonetheless had enough faith to allow them to be ripped off all over again in the mid-2000s.

In response to that round of ripoffs two members of Congress who had previously been on the payroll of their hometown financial sectors – Connecticut Senator Christopher Dodd and Massachusetts Representative Barney Frank – sponsored a new set of weak reforms. Before slinking out of Washington and into retirement. Would “faith in the markets” be restored again?

This time people seem to have had enough, and voted for a candidate – Donald Trump – who had promised to reinstate the even stricter and frankly anarchic Glass-Steagall law. That promise, it turns out, was a con. What the Republicans actually plan to do is gut the Dodd Frank law to make it easier for the financial sector to once again rip people.

You might have heard that a top target was the new Consumer Financial Protection Bureau. But in a surprise it seems that Wall Street wants to keep it, but turn it into an ineffective poodle, rather than get rid of it. So they can pretend that there has been actual reform, and once again convince people to trust them.

“Republicans might be reluctant to wipe out the agency just months after a scandal at Wells Fargo involving sham customer accounts. But the new Congress is widely expected to change the CFPB’s management structure so that instead of having a single, powerful director, it would operate under a slower-moving commission.”

Also under threat of repeal: the Volker Rule, which limited the extent to which banks with taxpayer backing through the FDIC and access to Federal Reserve emergency financing could take big, speculative bets that had nothing to do with financing businesses or individuals. And the fiduciary rule, a Department of Labor rule that requires financial advisors to act in their client’s best interests — instead of just ripping them off a la The Wolf of Wall Street.

At this point, after multiple attempts, perhaps it is time to stop trying to reform existing large financial companies, or even break them up. Their corporate cultures are too toxic, their exemptions from accountability too great, and their pay levels too high for them to ever provide any value to anyone else. And with each turn of the business cycle their number keeps shrinking into an ever-smaller number of ever-larger, more politically powerful organizations.

Perhaps the real goal should not be to restore “faith in the markets,” but rather convince people to stop doing business with the existing firms altogether, in favor new ones.

After the 1929 stock market crash, and subsequent revelation of the fraudulent conduct of the 1920s, host of new financial organizations and types of financial organizations sprung up, many in mutual and credit union form, to fill the growing market for financial firms that didn’t rob you. That’s what needs to happen now – not reform, but replacement. But it isn’t happening.

Perhaps that’s the reason that entrepreneurship and new business formation are down across the economy.

Business owners and would be business owners say they lack access to capital. Some blame economic uncertainty, regulation, or even Dodd Frank constraints on the financial sector. But the real problems are elsewhere.

I’ve got capital – our retirement savings. Most of it is short-term U.S. Treasury bills and notes, earning next to nothing. Why?

The stock market is overpriced, and due for a crash.

The bond market is over-priced, and due for a crash.

What I’d really like is to allocate some capital to new and growing businesses that might take the place of the corrupted businesses we already have. But I don’t have the time and expertise to identify the most viable and promising of such businesses myself. Which sort of companies are supposed to do that for me? Financial companies. But I don’t trust them, and increasingly neither does anyone else. That’s why small and new businesses can’t get access to capital, that and the global crisis of demand.

The largest U.S. financial institutions would have collapsed (along with most U.S. companies) in 2008, if the federal government had not stepped to prop up the economy at the cost of the national debt doubling from 42.0% of GDP in 2007 to 84.5% of GDP in 2015 — just as the Baby Boomers were set to retire and start collecting Social Security and Medicare.

We’ve been left bankrupt, with worse to come. But now, after having their shareholders pay $billions in fines for executive misconduct (again), those who control our financial institutions want to get rid of the Volker Rule and the fiduciary rule, and to stop being bothered by the Consumer Financial Protection Bureau?


How about having the government, instead of keeping the illusion of reform to “restore faith” in the existing organizations, actively seek to encourage people to create new ones instead.

Ones that would voluntarily choose comply with the sort of obligations imposed by the Consumer Financial Protection Bureau and the fiduciary rule. Ones that would do the hard work of identifying the most promising firms and would-be-firms, allocating capital, and monitoring those investments, rather than just trading huge dollar values of pieces of paper while adding no economic value at all? How about having an organization-wide level of compensation agreed to from the start that would be high enough that new, less greedy and entitled people would choose finance as a career, but low enough that it could be earned honestly? Those who already work on Wall Street would never accept that, because they’ve already upsized their lifestyles to a point that requires more than an honest person can earn. They are stuck “doing what it takes” to pay for that lifestyle.

Why aren’t people clamoring for new banks that can demonstratively have the motto “we won’t rip you off?” Some of them are. At the very least, people seem to have finally had it with hedge fund and mutual fund companies with their excessive fees.

“There was almost a $1 trillion shift from active investment management to passive in 2016, according to data from the Investment Company Institute. Why is this so ominous? When money moves from active vehicles to passive vehicles — which now have close to $5 trillion in assets — it earns 70 percent less on average in fees for the industry.”

From a prior post, here once again is a chart showing that the executive/financial class is no longer getting richer relative to the serfs the way the political/union class is, at least for the moment, after a big gap opened up after 1980s.


And here is a chart showing that Manhattan’s financial sector still accounts for nearly 1.0% of the nation’s private sector earnings at work, far above the level before the late 1980s junk bond bubble though down from recent years.


But this country still needs more large banks to process transactions. Who will create such firms? Who will work there? Here is one possibility.

“Large sample studies clearly show that the propensity of females to become executive-level offenders is simply lower. It doesn’t seem plausible that it’s because there aren’t women in executive-level positions. While women still hold fewer leadership positions than men, there are still many who could engage in wrongdoing if they so choose. It also doesn’t seem particularly likely that women are “better” at committing crime — that is, doing it and not getting caught — or prosecutors are less likely to target women. Women might be innately less inclined on average to engage in the choices that lead to harming others.”

In the wake of various “women’s marches” around the country, the so-called “gender gap” in pay is once again in the news. While there are probably still isolated cases where women making the exact same choices and doing the exact same work as men are paid less, however, I just don’t believe that’s true in general anymore. This isn’t the 1960s.

Today I believe women are paid less on average because they choose less highly paid careers on average, as one would find if they defined those careers sufficiently narrowly. Because they have different work vs. family priorities on average. And because they otherwise make different choices.

Choosing to not to rip people off, for example.

And here we have an industry, finance, in which the average person would probably be paid less if they actually earned what they were paid, and would earn what they were paid if they were willing to be paid less. That could be an advantage.

Consider the example of Wanda Jablonski, a pioneering female journalist and the Queen of the Oil Club. According to her biography, she was initially paid less than men doing the same job.

“I never would have been hired if they had these female rights then,” she said in 1976. “I was hired because I could be underpaid. The most important thing is the opportunity, not equal pay.” While she believed in equal pay, she was worried she would lose her job to a man, and never questioned the policy of her organization, the Journal of Commerce, that women only use their first initial rather than their name in bylines. But she used here time there to gain knowledge, experience and contacts.

And then she used her knowledge, experience and contacts to start her own trade publication, one that made her fairly wealthy. If you own the business, you can’t be underpaid. There you have it ladies, and others who are able and willing to accept a solid but not extravagant income if it allows them to keep their self esteem and sleep at night. If honest people don’t go into finance because finance is a den of thieves, then finance will remain a den of thieves. We need new dens.

If there ever was an opportunity, an industry in need of being disrupted, finance is it. And unfortunately if it doesn’t happen in New York, sooner or later it will happen elsewhere, and New York will lose its financial sector, and its tax base.

And speaking of tax bases, given that in most places for most political offices we now have a one-party system like China or North Korea rather than a two-party system, this country could use some new political parties as well.

In the wake of Generation Greed, still controlling and draining most of our existing organizations, reform has been defeated. Renewal requires starting over, or at least a trip through bankruptcy, with all prior deals cancelled and interests divested, to have a chance.