A Bailout Badly in Need of Reinvention

by Larry Grant

Frankly, I didn’t want to think much more about government regulation, but it is clear that somebody better.

In an earlier post on this blog, I said that the regulatory cycle went something like:  crisis, creation of a regulatory agency, quiescence, and capture of the regulators by the regulated.  This seems to be playing out right now in the current financial crisis.  There are, to be sure, some added wrinkles: a massive bailout of the financial industry and the adoption of dictatorial powers by the executive branch to dispense these financial favors – excuse me, a “clean” grant of authority.  Still, in reaction to the administration’s “solution,” a new regulatory agency is being proposed.

What can we expect to happen, and how might a reinventor think about it?  I expect that should such an agency be created, it will most likely contract out the actual work of designing and effecting regulation to the experts – yes, the same “experts” who created the mess in the first place.  So we will have bureaucrats, well meaning I’m sure, trying to deal with the flim-flam artists of our age.  Guess into whose pockets the money will flow?

There is an alternative – certainly not the only one, but something a little different.  It reminds me a little bit of the issues surrounding public financing of professional sports stadiums.  It has always seemed bizarre that the public should subsidize rich men’s jock sniffing without getting any of the reward.  If the public invests, why shouldn’t the public own?

As Paul Krugman says, “… if government is going to provide capital to financial firms, it should get what people who provide capital are entitled to – a share in ownership …”  If it is true that the actual percentage of bad loans is in the neighborhood of 3 percent, and the real problem is that we don’t know where they are in these mixed packages of mortgage-backed securities, then once it gets untangled, the people (read “taxpayers”) could get the potential profits.

What reinventors need to do is design ways that government can become savvy investors in the firms that solve the problems.  Then it will be clear who the customer is.

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