Calling all "Populists": Time to Take Econ 101

Government usually overreacts to financial crises. 

Here's what happens: waves of speculative excess periodically build in our economy, then crash, flooding otherwise high ground. Few understand the causes of these crises, but when they hit, politicians sense opportunity — not to learn from what happened and ensure it doesn't reoccur, but opportunity for personal gain. 

As the damage radiates from Wall Street to Main Street, politicians prey on the average citizen's fears and resentments. Members of Congress who do not understand how financial markets work forward ill-conceived plans to "strike back at the fat cats" who got us into such messes. A lot of these reforms either don't work or, worse, have negative unintended consequences that must again be dealt with down the road. 

Eliot Spitzer, the disgraced former governor of New York, is Exhibit A here. As Attorney General of New York, Spitzer seized on the dot-com crash of 2000 and railroaded big Wall Street brokerages into a settlement of charges that they issued biased investment research. The settlement forced these firms to spend $1.6 billion on restitution, investor education and providing "independent" research to clients. After the deal was struck Spitzer forgot about it and rode his heightened popularity to a win in the gubernatorial election. 

The settlement didn't work, and Spitzer didn't care. Hundreds of millions of dollars from the settlement were subsequently diverted from investor restitution and instead were used by state politicians to plug their budget gaps. The $55 million investor education fund mandated under the settlement disbanded without spending a dime on teaching people how to stay out of trouble in the next bubble. The money was instead transferred to an organization owned by the very brokerage industry Spitzer was supposed to have punished. The $460 million, five-year independent research program was a wasteful fiasco and a giant subsidy for research firms that weren't necessarily any better at picking stocks than the big, conflicted brokers that Spitzer targeted. Most investors weren't even aware that it existed. Spitzer himself was too busy soliciting the services of high-end call girls to pay much attention. 

This brings me to the current, $700 billion bailout the Treasury Department is proposing for our financial industry. Unfortunately, the move is necessary, in large part because the government was not vigilant enough over the past decade about regulating Wall Street. The government should follow the bailout with a well-researched, sensible reform of the financial regulatory structure. Instead, I fear that politicians will Spitzer us, seeking seemingly populist reforms that are good for their name recognition and re-election prospects but bad for our country. 

Take for example the desire of Democratic congressional leaders to attach to the bailout plan some provisions for capping executive compensation of private-sector companies. I don't think that folks who bankrupt their companies should run away with big severance packages, but I also don't think it's the government's business to decide what shareholders should pay the managers of corporations. If these guys get big golden handshakes, well, that's the fault of their shareholders, who should have insisted on better corporate governance. It has little, if anything, to do with how this crisis started and what is the best way to fix it and prevent it from reoccurring. 

Instead of spewing populist pablum, Democrats in Congress should vote for the bailout then come together with Republicans and private-sector leaders and put together a well-informed, balanced plan to fix our financial regulatory system. Most importantly, we must fix only what is broken, not what isn't, no matter how irresistible the political opportunity.  

Citizens should insist upon nothing less from their leaders and punish those who put their own interests above the national interest.