President Obama's Regulatory Reforms Don't Do Justice


President Obama's financial regulatory reforms will bring positive, meaningful changes to the way Wall Street does business. For this he should be commended. Nevertheless, the reforms fail to do enough, are not suitably instrumented, and sidestep systemic change. The reforms serve to affirm Wall Street's position, increasing the odds that Wall Street's grip over America will continue. This means more elitism and less true justice. The wealth and power gap between working Americans and the privileged elites of Manhattan Island will remain unjustifiably wide.

It is unrealistic to imagine modern capitalism, communism and socialism as distinct, non-overlapping systems. Each approach takes multiple forms, some forms showing hybrid traits. Modern capitalism tips toward an elitist architecture, largely ignoring traditional American sentiments toward a populist design. The elitist Wall Street architecture might be termed a “price speculation” model. This model tends to generate the greatest profits in financial enterprise from disequilibriums in the market’s pricing of assets.

The price speculation architecture creates tremendous temptations for elites to distort or manipulate asset prices to facilitate speculative gains — market efficiency thereby damaged. Furthermore, the price speculation model invites economic policies that encourage business cycles that can be deviously gamed in paper asset markets. The elitist architecture guarantees that the vast majority of working class people will not garner or maintain their fair share of new wealth generated by the economic system. The injustices are embedded and not subject to rooting out by mere regulatory tweaking.

An alternative financial architecture exists but is underdeveloped. The alternative is variously called a “public participation” model (my term), “economic democracy” (Marjorie Kelly, 1991), “democratic capitalism” (Jeff Gates, 2000), or other such things. Labels using the words democracy and capitalism are sometimes misunderstood, especially in the post 9-11 era in which the Bush Administration fought a war on terrorism in defense of ‘capitalistic democracy.’ For some critics, capitalistic democracy boils down to corporatism, the newest chapter of which is the socialization of costs resulting from corporations misjudging markets.

Public corporations may grow immensely, aided by laws that advantage the corporate structure. In mature financial systems some corporations come to dominate their enterprise spaces, concentrating the captured profits for the disproportionate benefit of players who have wrestled control of the boardroom, executive suite or common stock. Eventually, corporations may begin to resemble aristocracies — old world systems restructured and renamed so that they might dominate new world landscapes.

The public participation model of capitalism opposes this injustice. Arguably, a reasonable share of the profitability of the nation’s 10,000 largest corporations belongs to the public, not just executives, shareholders and employees. One-third of the profit is not too much to be shared by upstanding people who make the nation (and world) a functional place for enterprise. Unfortunately, even though the general public invests in mutual funds and stock index funds, they are unlikely to reap (in the aggregate) a fair share of the profits prior to income being dispersed disproportionately to the privileged few. As a result, public corporations become mechanisms to funnel capital to privileged persons so that these individuals may grasp the new entrpreneurial opportunities that develop. This outcome deprives the nation of the social health that comes from a fairer distribution of real opportunity.

Another important feature of the public participation model is a financial architecture that inhibits speculation and converts most of the speculation that remains into capital for public domain infrastructure. Some speculation on asset prices is inescapable because of variable circumstances that inhibit our ability to ascertain the future. However, when markets are not roiled by flawed economic policies or made speculative by design, markets keep asset prices stable enough to make innovation and productive engagement more attractive means of making money than the gaming of asset prices. Thus, the purpose of the public participation model is to provide incentives for people to build sustainable societies rather than pursue financial killings through speculative machinations.

If a new day of justice is to dawn, the price-speculation model of finance capitalism must be replaced by a financial architecture that allows working Americans much fuller participation in the income stream of public corporations. Mere re-regulation will not suffice. Capitalism must be redesigned, but not through the growth of bureaucracy. The current distribution of rewards is not constructive or sustainable. Furthermore, it is not just Wall Street where rewards are skewed away from the real value of contributions. The health care field looks increasingly like Manhattan Island as it capitalizes upon the insurance environment and government intervention. Med Street taxes the public excessively for the quality of services rendered. Med Street is becoming the new King George.

The nation must evaluate the idea of merit so as to reduce preferential bias toward the economically powerful. Tens of millions of Americans do important things that give our nation a future. It is madness to concentrate the largesse of the system in the hands of financial predators on the top and unmotivated slackers on the bottom. What about the middle class and the broad public interest? The countless billions of dollars that are siphoned off in our financial markets through price volatility and speculation belong in the public domain.

Until President Obama finds a way to fuel American capitalism on something more morally credible than price speculation he has not reformed Wall Street prudently. Price speculation during the last fifteen years has not aided price discovery, at least not constructively. It has impeded price discovery by creating massive swings in asset and commodity markets, unsustainable gains in real estate, and distortions in prices that benefit the financial adept and threaten the future of decent people. By sowing this corrupt model of capitalism throughout the world, Wall Street has built the case for Armageddon.

At the minimum, the price speculation model increases the odds that financial elites will be representative democracy’s veiled principals. Viewed objectively, a world shaped by the institutionalization of price speculation as a subsidy from the working masses to the Wall Street rich demeans the idea of human decency and undercuts humanity’s progress toward globally just civilization. President Obama needs to pull away from the influence of some of his duplicitous economic advisors if he hopes to leave a legacy that does not cave in behind him. There is an ex-president in Texas who is learning what that feels like.