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An argument for smart financial and economic regulation

In moments of stillness, we enjoy imagining the ideal living space that brings smiles to our lips. For many of us, it is hot summer nights sitting on a foot-tapping porch and enjoying the rhythmic taps. To music accompanied by the harmonic twanging cords of “Salty Dog.”

Soft breezes disturb the still-heated air filled with aromas of honeysuckle. They are conjuring images of long-forgotten recollections of rural communities like Mayberry and a Sheriff named Andy Taylor. 

The fictional Mayberry R.F.D symbolizes a way of life where the simplicities of common sense economics companioned our daily routines, adding an elusive assurance that all was right.

During the 1960s, the TV series The Andy Griffith Show reminded millions of fundamental economic values. They brought comfort to foot-tapping porch communities in rural America.

Ben Weaver served as the real estate baron and department store owner. Mayberry’s troublemaker Ernest T. Bass was vital in maintaining the delicate small rural town’s economic balance in selling and marketing his moonshine. 

When joining the local savings club, the depositor gets a new toaster for their patronage. The banker was their neighbor, realtor, and insurance agent, not the retirement broker or high finance investment advisor. The passing of Andy Griffith last week was symbolic of the death of a more straightforward monetary system. 

Andy Griffith was part of that down-home Christian value system. The robust and brilliant thread wove tight the fabric that cloaked our dreams. During this time, University of Chicago Economic Professor, Nobel Prize winner, and Washington policy advisor Milton Freidman was teaching the concepts of the evils of creeping socialism. Moreover, Ernest T’s moonshine business was an example of unfettered capitalism. 

The government agents stalking moonshiners in the hills and woods of North Carolina was an early sign of encroaching government-imposed socialism, the strangling hold of government regulation on “hooch.” Mayberry was a simplification of the economists’ model as detailed by Adam Smith in his “Invisible Hand. ” 

This concept framed much of what Mr. Friedman embraced. Let commerce reign free of regulations. The markets will dictate the quality and shape of a business. Mayberry was an economic model that illustrated those concepts. 

In Mayberry R.F.D., the veneers of safety, sound mortgage practices, and foot-tapping porch homes holding their market value reinforced our beliefs of a livable future. 

Savings accounts and nest eggs were generational. Decades later, savings and loan banks, unable to compete with the growing number of financial firms offering non-banking services and products, were almost out of business. The markets demonstrated that their viability in a changing global economy was not possible. Account holders heard threats of untold losses. Nevertheless, government intervention saved many nest eggs. Then came deregulation, and multinational banks grew in unbelievable power. 

A decade after banking deregulation, investment banker James “Jamie” Dimon, CEO of JP Morgan and non-resident of Main Street, admitted that his firm suffered an estimated $4 billion loss through dishonesty. Then UK-based Barclays, known for its clusters of banking businesses, revealed cheating in mortgage indexes or LIBOR speculations. They are globally dominant in corporate and investment banking services and contain the largest group of wealth managers. The most recent disaster du jour is HSBC. It dominated business news when their money laundering and terrorist ties came to glaring light. Massive monetary exposures in the mismanagement of investment funds scandals or mortgage banking cheats have undermined the confidence in multinational or universal banks. Many politicians began parroting the economic phrases of Economist Milton Freidman. He spent a lifetime evaluating why banking should not be government regulated. In another financial meltdown – it would lose much of the world’s wealth. 

The regulation or deregulation of our financial institutions is not the only cause and effect of global economic stress. 

Blame many of our economic woes on global structural unemployment. It swells liquidity artificially through social benefits like unemployment payments while not addressing the need for full employment.

Nevertheless, the late Mr. Friedman shared that any intervention by any government-authorized regulator would merely strangle free enterprise. For example, he cites that when government regulations artificially set the minimum wage for workers, it hampers growth in the private sector. In allowing job creators to set their pay rate, global employers like the McDonald Corporation would find it easier to hire more workers at lower hourly wages. Mr. Friedman offers that this is a means to economic stability.

Debates continue about the societal benefits of these financial policy changes. The missing realities are how these changes burden communities with too many marginalized laborers—endangering workforce quality by marginalizing with inadequate training and encouraging stagnation to upward mobility. Lack of upward mobility reveals that today’s labor market suffers too few well-trained wage earners. 

While non-regulated corporations cultivate overpaid executives and feed multiplying and greedy stockholders, multinational corporations thrive. 

However, fiscal uncertainty, vis-à-vis congressional brinkmanship, continues to plague projections for healthy outcomes in economic recoveries. A superficial review of Mr. Freidman’s random observations remains in question. Instead, it would be better to cite that the world’s central banks must act as guardians of economies. During periods where greed or mismanagement of wealth has created a downturn in economies. 

Suppose global regulators held to the views of Adam Smith and Milton Freidman. Wild global market fluctuations attributed to Ben Bernanke’s chat events before Congress would be non-existent.

Mr. Bernanke reminded the world that all economic regulators must act within dual mandates.

 The dual mandate for the non-governmental agency Federal Reserve System and its FOMC or Federal Open Market Committee is the same as all global economic regulators. In 1977, Congress amended The Federal Reserve Act. The monetary policy objectives of the Federal Reserve were,

 “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

 Economics is a science based on daily behavior that challenges old memes. Western forms of capitalism exemplify a  perfect example of how the social contract within the system function. While exampling why often financial deregulation is the gatekeeper that helps the rich get richer.

 Regulatory institutions help keep socialization and fiscal interventions honest. 

When an economic construct no longer serves to maintain the system’s health, it will present like a boil needing expunging. 

Even the simple economies of foot-tapping porches have a place in today’s economy.

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 Posted by Barbara Cerda 

This entry was posted on Saturday, July 21, 2012, at 3:29 AM and is filed under AP-Business,