America / Economy / Politics / Tax

Free but Responsible Markets

Occupy Wall Street started with an emotion: anger. As average Americans dealt with an insecure job market, unemployment, underwater mortgages, and overwhelming increases in the cost of education and healthcare they watched as the financial industry was rescued from its own poor judgment by the federal government. What was perceived was a collusion of massive proportion between Money and Power. The government was now complicit in the robbery of the poor to feed the rich. Although the primary objective of TARP, to prevent the complete collapse of the banking and finance industry, had significant positive externalities to the public and the economy, it is difficult on the individual level to recognize the causal chain for those benefits (especially when the benefit is only a relatively better result as opposed to a good result).

What is easily identified is the flow of money from the taxpayer coffers to financial institutions that subsequently paid top executives incomprehensible sums in salaries and bonuses. This view ignores the complex incentives and policies that were created to promote “affordable housing,” subprime mortgages, and mortgage-backed securities (MBSs), but it does appropriately identify a degree of injustice in the results of TARP and the Dodd-Frank Act. More or less, fault for the crisis escaped the otherwise robust civil and criminal law. This is true, unapologetically so, because the banks acted logically to public policy and market responses when they created the MBSs. Unfortunately, “the people” cannot prosecute Congress for criminal negligence in policy formation, and cannot sue Congress for damages resulting from legislation. Clearly the policies and programs were flawed, and certainly miscalculations by the financial industry (including credit rating agencies) left the markets vulnerable to recession, but in all but the most extreme cases criminal or civil liability would be an unjust result as well.

First, the response manifest itself as the Tea Party with the aim of using the political system to remedy the situation. The results from the movement were undeniable, the 2010 elections significantly reduced Democrats majority in the Senate, and overwhelmingly transformed the dynamics and leadership of the House of Representatives. These outcomes did not produce the results the Tea Party desired, and trust in Congress to provide a remedy is now all but non-existent.

The Occupy Movement was created as a result of the building frustration, and lack of trust in the government to provide the remedy. However, it quickly lost focus and the demands published by OWS are largely a mishmash of broad statements and progressive-left agenda items, with little relation to the financial crisis or the great recession. Demand #1 calls for the elimination of corporate personhood, which is an entirely misplaced objective, but is only a tangent to the original purpose behind OWS. It isn’t until Demand #13 that OWS makes a demand targeted at the group’s most relevant grievance, which calls for the indictment of banks, brokerage firms, and insurance companies. For the reasons discussed above, this demand is impractical and equally unjust for all but a few cases in which evidence is available to make a case for fraud. Nonetheless, Wall Street provides close substitutes for the perceived crimes committed, and the presupposed guilty parties.

The Securities and Exchange Commission recently enacted a substantial campaign against insider trading by top-level executives at hedge funds. This initiative began four years ago, before the Occupy Wall Street or even the Tea Party even existed, but the timing and outcomes are relevant to the accusations of injustice from the government’s response to the financial crisis.  “Operation Perfect Hedge” has resulted in over 60 arrests. On January 18th the SEC charged seven hedge fund managers and analyst and two hedge funds with insider trading. Late last year Raj Rajaratnam, hedge fund manager at Galleon, was convicted and sentenced to 11 years in in federal prison. The longest sentence ever imposed for insider trading. Additionally, a civil penalty of $92.8m was imposed. Both the prosecution’s request for such a hefty sentence, and the court’s willingness to impose it are signals that complacency and tolerance of white-collar crime are waning.

The simplest remedy to the perceived injustice is to publicize enforcement of securities fraud statutes already on the books. Reforming regulations to incentivize the restructuring of commercial and investment banks away from “Too Big to Fail” status would be another step in the right direction.

One thought on “Free but Responsible Markets

  1. Pingback: 99% Solidarity, Yet Politically Disenfranchised? | Policy Interns

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