accountabilitybloke (old blog)

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Half-baked reform….

There are a number of ways to view the passage of banking refom legislation. For the Obama Administration and members of Congress, it is another “victory” — a hard earned trophy to put on the mantle and which can be displayed with some pride as the midterm election parade begins to take shape this fall. For the banks, it is not so much a defeat as a setback that merely changed some of the rules of “the game” that they had mastered before — and will master again.

But for the American economy and the American people, what just passed through Congress and will be signed into law next week by President Obama was hardly more than a collection of half-baked measures that failed to deal with the core problems of accountability in the financial markets.

In fact, what we have before us is “regulatory reform,” not banking reform.

The legislation adds a couple of chairs on the Titanic’s deck, and it even repairs a couple of the old ones. But these reforms do nothing to change the ship’s course, or the fundmamental practices of the vessel’s crew.

Looking back at the rhetoric surrounding the calls for reform early in the Obama Administration, one finds lots of references to enhancing the “accountability” of Wall Street and those actors in the global financial markets whose decisions and actions brought our economy to a virtual stand still. What that rhetoric reflected was a sense of indignation at the callous indifference and irresponsible behavior of Gekko-like characters whose moral bearings were more appropriate for a casino than a financial market. From this rhetoric one would conclude that the purpose of reform was to provide the appropriate setting for more responsible behavior by those bankers and their agents. But when it came to translating the rhetoric into policy proposals, we were left with reforms aimed more at the community of regulators than the banking community itself.

The problem is, in part, the result of our ambiguous understanding of what it means to be accountable. We have lost sight of the fact that accountability means more than being subject to regulatory oversight. It also means behaving responsibly.

Historically, accountability was a means of establishing a sense of responsiblity in those being held to account. You were granted a royal or (later) corporate charter with the stipulaiton that your were expected to conduct business in a responsbile and accountable manner. That meant living up to the standards of the license (or franchise) to engage in business. Accountable behavior — conducting business in accordnace with the standards under which the charter was given — was an unquestioned expectation. In a sense, to engage in business was a moral activity for it demanded that you operate within the confines on the what was acceptable and appropriate behavior in the marketplace. It is little wonder that the individual credited as the founder of capitalism, Adam Smith, regarded himself as first and foremost a moral philosopher.

Today, we have forgotten about the “responsbile for” notion of accountability. Accountaiblity means little more than being answerable — answerable to shareholders, to regulators for following rules, and (in cases of malfeasance and fraudulent behavior) to the legal system. The package of reforms heading to the White House reflects our obsession with making bankers “answerable to,” but fails to make them morally “responsible for” something with their actions.

Which begs the unaddressed question underlying the entire reform effort: having enhanced the government’s capacity to make financial markets more answerable, what exactly are they answerable for?

There is nothing of substance in the current legislation to highlight the fact that we want a banking community that deals with more than maximizing quarterly profits. What was needed was basic banking charter reform effort — or at the least something in the order of the reforms advocated by Paul Volker. Only when we confront the challenge of delineating what it means to be a banking enterprise — one that serves the transacitonal needs of the communities within which it operates — will we have true reform.

My own bias is toward a view of banks as public utilities. The now defunct Glass-Stegall Act (as well as many pre-deregulation state laws) came close to reflecting this view by severely restricting the capacity of commercial banks to engage in high risk endeavors, and the result was a stable (if rather dull) banking sector. Real reform would not necessarily bring back Glass-Stegall, but it would certainly do more than merely patch up the regulatory infrastructure of financial markets.

July 16th, 2010 Posted by | accountabilitybloke | no comments