the connection between finance and politics

Deregulation of the financial markets – starting under Reagan, S&L crisis, leading up to Glass-Steagall repeal under Clinton, removing separation between investment banking and commercial banking, which led to new mortgage vehicles including new bundled derivatives (CDO’s and their ilk) and the appropriately named “sub-prime” mortgages that are now working their way through the financial system – inadequate regulatory control and accountability – nobody really knows or ever will know who holds the “bad paper.” Already been around the globe a few times from what I understand.

The fear is that a Democratic Executive and Congress will enact punitive and/or inappropriate regulatory legislation to reverse the end game. Obvious example is Sarbanes-Oxley which has increased the cost of doing business without impacting the off-book accounting vehicles. Another example is the anti-speculation rhetoric which will lead to what kind of legislation? Another example is the windfall profits tax. (tax code not regulatory reform but same ballpark.) Not to mention nationalizing a handful of the usual suspect industries.

Wrap it all up in a package of “comprehensive” reform and it’s Hillary Health Care Part II – gridlock from an inability to compromise and lack of focus to implement incremental reforms.

I don’t really care what’s buried in the Tower of Chicago but I am angry at the systematic dismantling of reasonable regulatory code started by the Republicans and continued under Clinton, and I am very skeptical of the technical and political skill set on Democratic side of the aisle to design regulatory reform legislation that isn’t punitive or just stupid (windfall profits tax schemes).

Spengler over at Asia Times makes the point that the reason the Russians don’t understand their American counterparts is that they can’t believe we are this stupid. There’s a lot of that going around.