What to do about those danged bank lobbyists

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Barry Ritholtz has a good summing-up of a new paper (pdf) by three IMF economists on the link between lobbying and risk-taking by lenders. The gist: Firms that made the riskiest loans spend the most on lobbying Congress. And what were their lobbying aims?

• prevent  any tightening of lending laws that reduce the benefits of short-termist strategies over long-term profits;

• allow systematic underestimation of default probabilities by overoptimistic bankers;

• not just to originate loans that carry more risk, but to convince legislators that such lending is prudent;

• to thwart bills aimed at lax lending standards and riskier loans;

• to tighten regulations that restrict entry by others preventing competition;

• to have a higher probability of receiving preferential treatment in a crisis.

The Huffington Post also has an epic new examination of what it calls “the cash committee”—the House Committee on Financial Services. The gist is that the committee’s Democratic ranks are heavy on  moderate-to-conservative first- and second-termers that House leadership put on the committee so they could raise lots of money from financial interests, thus increasing their chances of getting reelected but decreasing the committee’s chances of passing meaningful financial reform.The general takeaway here is that Congress is a bit, ahem, compromised when it comes to dealing with the financial sector. It’s compromised in dealing with lots of other industries too, of course, but the finance-insurance-real-estate crowd is bigger and richer than any other industry, plus it just caused the worst economic downturn since the Depression. Those who would address the financial problems of the past few years with better laws and regulations (a group of which I am a member) have a big problem when the rulemakers are captured not just by the industry they regulate but the dodgiest parts of that industry. So what do we do about this?

1. Get out of the regulating business. This is the libertarian solution, and while it reeks a bit of libertopianism, there is a basic truth behind it: The less affected by regulation and/or government spending an industry is, the less it spends on campaign contributions and lobbying, as a general rule.

2. Shine a light on what’s going on so the public interest can trump private interests. This does work sometimes. And the increased attention paid to the House Financial Services and Senate Banking committees over the past couple of years has made life more difficult for financial industry lobbyists (at least, that’s what people in the financial industry say). Because the Republican Congressional leadership has decided its most promising political strategy for the first two years of the Obama Administration is to be against everything, though, it’s hard to put together majorities without including goodies for the most bought-and-paid-for Democrats.

3. Do something about all that lobbying and campaign giving. The problem here is that past efforts at campaign finance reform seem to have only made things worse. I’ve been enamored for a few years with an idea I got from an English constitutional scholar whose name I’ve forgotten who was cited in some piece by Milton Friedman that I can’t find at the moment (any help from readers on this would be greatly appreciated). Writing around the time that the British government was beginning to hand out old age pensions, this crotchety fellow wrote that of course recipients of such government handouts shouldn’t be allowed to vote. Because if they did vote, they’d just vote for more handouts.

Now I love the idea of proposing that Social Security recipients shouldn’t be allowed to vote. But we’re reaching the point where Social Security isn’t really a handout—past generations of recipients got far more out than they put in, but we Baby Boomers will be getting only a modest return on our money and who knows what the Gen Xers will get (once they’re done saving the world). So let’s apply the idea to campaign contributions: if a company benefits from government guarantees and handouts, none of its employees can be allowed to give to Congressional campaigns. This would presumably require a constitutional amendment, would raise all sorts of difficult questions about what constitutes a government handout (do tax credits count?), and would of course inspire an epic hunt for loopholes. But it’s at least fun to contemplate, isn’t it?

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