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Pearlstein: Regulatory Reform

Steven Pearlstein
Wednesday, May 26, 2010; 11:00 AM

Washington Post columnist Steven Pearlstein hosted a discussion on Wednesday, May 26 at 11:00 ET on the financial regulatory reform bill.

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Regulations and Regulation: In your column today, aren't you conflating the problem of insufficient regulations with the problem of lax (or even corrupt) regulation? For example, in the case of the MMS and the oil spill, I'm not sure that having additional pieces of paper to fill out would have made any difference, when the problem was that the existing regulators had been compromised (another example would be the fact that someone signed off on BP's promises that they had a plan to deal with a worst-case spill, when it is now obvious that no such plan existed). Reforms to the regulatory structure (such as splitting the MMS into three pieces) might help address the problem of woefully inadequate enforcement, but new regulations wouldn't necessarily help.This is different from, say, the financial sector, where it's clear that new regulations are needed to rein in some of the overly risky behavior that contributed to the meltdown in 2008. In that case, the regulators need some new tools in their toolbox.

Steven Pearlstein: Its a good point and an important distinction: enforcing rules that are already on the book versus having lots of new rules. Its different for different sectors, but I agree that the bigger problem during the Bush years has been the refusal and reluctance to aggressively enforce the rules that already exist. I don't think, however, I conflated the two things too badly in the column, although I did consider them as something of a piece. They certainly have the same political and ideological roots.

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When is it enough?: I understand your point that industry has to abide by the law and must be held responsible, but when are there too many govt regulations? There are tens of thousand of pages in rules and regulations, and it's impossible to comply with every single item. I think the more rules and regulations out there, there is more incentive for these companies to skirt the law by bribing officials (perfect case the Minerals and Mines employees with cozy ties to BP). Besides, if efficiency was simply a matter of increased govt regulation, Cuba and North Korea would be among the most prosperous countries in the world.

Steven Pearlstein: But first of all it takes a core belief that regulation is necessary and important for the successful operation of a free market economy. Alan Greenspan, frankly, didn't have that. George Bush and most of his cabinet didn't have that. The Republican leadership in Congress doesn'thave that. And the presidents of the Chamber of Commerce and the National Association of Manufacturers don't have that, despite their protests to the contrary.

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Risks vs. benefits: The common refrain from drilling proponents since the spill is that we know there are risks, and we just need to strike the proper balance against the benefits. Could you help me understand exactly what the benefits are?If we opened up all of our shores for drilling, what effect would that have on the price of oil? And on the price of gas? (More oil won't expand refinery capacity, after all.)It seems highly unlikely to me that offshore drilling will greatly benefit American consumers. However, it will yield enormous benefit to the companies that get to extract the oil.Is the argument that we should balance oil companies' benefit against the taxpayers' risk? That sounds a lot like Wall Street.

Steven Pearlstein: I support increased drilling under better supervision, particularly for gas. The reason to do it is because in the case of gas, additional gas can lower the price and displace coal, which is worse for the environment. The reason to drill for oil is that domestic oil can displace foreign oil, which hurts our current account balance and causes us to spend lots of money and lives in the Middle East defending our economic interests. It also helps to keep some downward pressure on the cost of imported oil and raises revenue for state and federal governments. That doesn't mean that drilling is riskless, but neither is shipping in the oil from somewhere else, or using nuclear power to displace oil-fired power and gasoline engines. The environmentalist fantasy that we can do it all with windmills and biomass is just that, and is not a politically useful contribution to the discussion, in that it is too easy for the other side to ridicule and dismiss and use as an excuse for blowing off mountaintops to get the coal.

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Proposed ideas to reduce the deficit: I read your recent article on your ideas to both raise taxes and lower spending to close the deficit. It would be great if someone like the Wash Post built your ideas into a calculator model and other competing ideas could be built alongside so that people like us could compare the ideas and see what the impact would be. Maybe this could be a product of the Deficit Commission ???

Steven Pearlstein: If the Deficit Commission were doing its jobs, it would construct this "game" or "software," not only for its own members and members of congress, but to build support with the general public. It won't because it basically doesn't want to get input from the public. The staff thinks it knows what the "right" answers are, many of the members of the commission are merely there to tow a political line, and the White House economics staff also isn't interested in getting ideas from the public -- it wants to manipulate the public, not consult with it. Its a holdover from the Clinton days. A very insular crowd, actually.

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Countries that are "Too big to fail": While the financial regulation bill may help safeguard the U.S. in the future from banks that have had such a negative impact on our economy, it seems like there is also a threat from poorly-managed foreign economies (Greece, et al, are making the stock markets very jittery these days). Is there anything we can do to protect ourselves from the impact of bad decisions made by other countries? Why in the world should a country like Greece (we're not even talking about relatively strong economies like Germany or Japan here) have the potential to destabilize our own economy?

Steven Pearlstein: If it were just Greece, it wouldn't. Greece was just the tip of an iceberg that is now more visible to everyone else. And the global economy is just more interconnected that it used to be. When you talk about "we", you are talking as if we Americans have everything in common but we have nothing in common with workers or consumers in Europe or Asia. That is just silly. Economic interactions don't really respect political boundaries. They don't between Virginia and Maryland, or Virginia and California, and they don't, to a somewhat lesser extent, between the U.S. and Germany or the U.S. and China. The vocabulary we use to talk about these things needs to change.

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The Blanche Lincoln Amendment: I'm smart enough not to pretend to understand how this shakes out. But what I hear from Wall Street talking heads is, if the Lincoln Amendment stays in FinReg, it will kill American banks, because all the business will switch to European banks, which will still be able to do the credit default swaps the Lincoln Amendment would prohibit. Is there anything to this, or is it overblown lobbying hooey?

Steven Pearlstein: This is a lot of hyperbole, but in any case it is irrelevant. The Lincoln ban on banks have derivatives desks just won't be in the final bill. The House doesn't want it. The Senate co-chair of the conference doesn't want it. The administration is opposed. The lobbyists are opposed. Its good that it is in there, however, because the industry will spend so much time, energy and political capital trying to get it out that they will not be able to knock out other things they don't like that are worth preserving. So not to worry. Just enjoy the theater.

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Regulatory Reform: Great article today. I have been thinking the same thing for a while now. But, what makes you think that business will changes its spots after eight years of a Republican in the White House and neglect of regulation? The lack of true business leadership in this country on anything is astounding. They take a back seat to the US Chamber of Commerce!

Steven Pearlstein: That's actually good news for our side, because it means that the business lobby will become more irrelevant before it wises up and becomes more relevant.

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Rules-based vs principles-based regulation: What is your take on Canadian-style regulation which is principles-based versus rules-based? Would that work in the US?

Steven Pearlstein: I am for principles based regulation, which gives regulators broader and more flexible authority and an ability to act much quicker. A lot of the regulatory problems we have comes from the tong wars that go on, largely out of public view, over each and every word of each and every line of each and every regulation, which industry then evade through clever tactics that use the bureraucratic processes to their benefit. The case of Massey and the safety infractions is a great example. Whereas in a principles-based system, the head of the mine safety agency could just say, "Hey, these mines are unsafe, there have been repeated violations, and I'm using my plenary power to shut them down before somebody gets killed. And they'll stay closed until you fix them up and you come up with a plan to insure that they will remain safe. " That happens once or twice and the industry will get the message and clean up its act.

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cost of regulation vs. cost of screwing up: Why should corporations agree to moderate regulation (the purpose of which is to prevent the "oopsies" of doing business) when they are not required to actually pay for the damage they do? Seriously, how anyone can advocate for corporations to have their losses capped when they hurt people and at the same time advocate for less intrusive regulation is beyond me. Oh, and let us also remember that corporate finance departments are bound to be horribly inaccurate when they try to predict the cost of being regulated. These are the same people who predict huge cost savings from the synergy of corporate mergers (less than 2/3's of which end up saving any money at all, never mind the amount predicted). They are hopelessly bound up in predicting that doing stuff is going to make money and letting things go on as they are will be a disaster. If they didn't, how could they justify their bonuses?

Steven Pearlstein: A lot of anti-corporate sentiment tossed into the salad there. But your basic point, that it is folly to trust corporations to accurately and dispassionately tote up the costs and benefits of a regulation. It is an even greater folloy to expect companies or industries to regulate themselves. And as Alan Greenspan now admits, it is the greatest folly of all to expect that market discipline will be sufficient to stop companies from doing some things that are not in the interest of society or even of their own shareholders (Citigroup management, for example, that insisted it had to keep dancing until the music stopped).

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The real upcoming crisis: Steven:You make good points, but I think collectively we are facing a much graver crisis than regulation of various of industries. I know its not your topic of the day, but what we really need is regulation to prevent further fleecing of our states & cities from public employees. I don't think I'm exaggerating when I say Albany, Sacramento or practically every other state capital has been hijacked by public employee unions who are literally threatening to bankrupt our states & cities.Every time I hear that Governor Patterson or Mayor Bloomberg are proposing cutting mental health clinics, meals on wheels, library hours, closing firehouses, cutting train & bus service etc., I cringe and think this is a DIRECT result of years and years of the collusion of cheap politicans & unions.You can regulate Wall Street, coal mines, Toyota, pharmaceutical companies up the wazoo, but mark my words, the public employee pension & healthcare crisis will make the Wall Street crisis look like a speck of dirt.

Steven Pearlstein: You are not exagerating -- it is a huge fiscal problem, a great injustice and it goes hand in hand with running a professional, efficient, aggressive but market-friendly regulatory environment.

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bureaucracy and red tape: It's a common trope that Europe suffers under a weight of regulation, compared to the free and easy US, but is it true? I've been self-employed in both this country and the UK, and I can tell you that the tax code is a whole lot simpler in the UK (and the people who enforce it are pleasant to deal with on the phone!) I've also dealt with the US govt as a contractor -- the bureaucracy is mind-bogglingly complex and frequently inept. Are there are definitive studies showing how Europe and the US compare in terms of light-years of red tape?

Steven Pearlstein: They do have much more intrusive regulation of business (and everything else) in continental Europe. Britain is more like us than they are like the French.

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The Incredible Naivete of Businessmen: I appreciated your column today. What I find frustrating about the opposition to reasonable government oversight is the truly childish belief that business is on the side of the angels and, therefore, incapable of error. It's silly. Human beings are, by nature, slothful, greedy, self-indulgent and eminently corruptible. Most of them not only sin regularly but also frequently make math errors. An MBA or a executive title or even a Ph.D. from some school of economics are not shields that endow their holders with magical powers and wisdom, but that seems to be the position of the business-is-always-right crowd.Yes, we can blame anti-regulatory politicians, but I think the wide-eyed business media contributed and still contributes to an atmosphere in which business is perceived as "better" than government, when they are simply two kinds of interconnected human activity, each with its own pitfalls. A little mature acceptance of human frailty is a prerequisite for improving regulatory enforcement and legislation.

Steven Pearlstein: Obviously the media takes in a wide cast of characters, but I'd say the mainstream business media is not guilty of your charge. Sorry. We don't run the world. We don't even shape broad public opinion that much, except to bring the public the facts of what is going on. And just because some news outlets may uncover some stuff, it doesn't mean people will pay attention to it.

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Socialism: Why don't people realize the US has become a socialist economy. We all pay (directly or indirectly) property taxes which pay for primary and secondary education for all, we all pay payroll taxes for Medicare/Medicaid which benefit only some, and in 2008 we paid for a bailout for Wall Street. A capitalist economy would be "if you want it, pay for it" and "if your business is going to fail, it fails."

Steven Pearlstein: No, that would be a libertarian paradise. It would also be Sierra Leone. Hope you like the weather there!

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Principles based would be good: I like your comment about principles-based versus rules-based regulation. However, I don't think this will work in the lawsuit-based culture in the US. How can a regulator hold up a claim in court that something is unsafe if he can't point to specific violations?

Steven Pearlstein: Because the case law is changed to give administrators much broader latitutde, based on changes in the wording of the law.

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A much less important example: I worked in the cable TV business throughout the 90's and early Oughts, when the Gore/Hundt "re-regulation" was put into effect. I can tell you that we spent a lot more time and money figuring out ways to circumvent the regulations than in compliance. We didn't actively break the rules; we just found ways to not break the rules and still get what we wanted.

Steven Pearlstein: Protecting the rest of us -- they, frankly, couldn''t care less.

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So what are the benefits?: Steven,The gas argument is compelling, but I just don't buy your argument on oil. We don't actually import very much from the Middle East -- most comes from North America. Whether we buy oil extracted from Louisiana, California, or Canada, OPEC will still set the price. Maybe increased tax revenues are the point of it all, but I really don't see a tangible benefit to the consumer -- increasing global supply by a few percent for a commodity that is controlled by a foreign oligopoly does nothing to lower the price of gas.

Steven Pearlstein: This is the standard environmentalist argument -- no particular "find" of oil is ever big enough to account for more than a few percentage points of world output, so it is insignificant, so therefore it is not worth the environmental risks. The thing is that if you add up all these "insiginificant" sources of oil, they add up to the market, but its a very useful debating point when you basically believe that there should be no oil, which is what the environmental movement believes and wants the rest of us to live by. from outside North America. It's just not true that we in North American are self-sufficient.

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MMS: One of the strengths of this country - and what makes it possible for us to seamlessly transition from one administration to the next, regardless of party - is our civil service. This can also be a weakness in regulation if the civil service has become accustomed to accommodating the businesses it oversees. This is the problem with MMS - they have been in bed with the oil companies for years and it's hard to root out career civil service. My hope is that the fracturing of MMS will allow the Obama administration to root them out.

Steven Pearlstein: A lot of it has to do with leadership and culture and compensation, all of which can be fixed and improved. There are other countries with more effective civil services, and we could take a page from them.

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Domestic vs Foreign Oil: Can you explain the difference between domestic oil (drilled in US waters for example) and foreign oil in relation to "energy independence"? Is BP obligated to sell Gulf oil only to the US? Doesn't it just go on the international market? Other than certain fees/leases paid, what is the difference in terms of where it comes from?

Steven Pearlstein: There isn't a huge difference, other than it causes us to run a dangerously high trade deficit which needs to be financed.

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Sarah Halzack: Hi Chatters-

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Tall Paul: Where does the Volcker rule now stand? Will it get stronger or weaker in conference? Nouriel Roubini argued in Newsweek it should be much stronger.http://www.newsweek.com/id/237631

Steven Pearlstein: I'm of two minds on Volcker. I think we should very much limit how much speculative investing banks do with their own capital -- if they want to be in the hedge fund business, let them do start a hedge fund outside the context of a bank or bank holding company. On the other hand, it is very difficult to distinguish between market-making activities of a bank's "proprietary trading" desk and trading for the bank's own account. And I haven't yet seen a version of the Volcker rule that gets around that problem, other than one that becomes so loose that it is mostly meaningless.

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Re: Countries that are Too Big to Fail: Is this is the price we pay for a global economy? That by free trade agreements and other reciprocal investments between the US and many other nations around the world, that we are all connected? Or is that a simplistic view?

Steven Pearlstein: There are costs and benefits for a globalized economy. As a general rule, for most people the benefits outweigh the costs.

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States/Feds: In some cases, regulation enforcement has been delegated (detrimentally I may add) to the states, who protect industries from proper regulation in the name of job preservation. Environmental enforcement being among the worst.

Steven Pearlstein: This is one area where liberals and conservatives are inconsistent and intellectually dishonest. Liberals used to be for strong federal regulation, except when a few states actually are tougher regulators than the feds, in which case they want to make an exception. And while business and conservatives often argue that the feds should let the states regulate because they can more easily capture state regulators and legislatures, other times they argue that business needs one standard rather than 50. As a general rule, I think businesses that are basically national in scope should be regulated by national regulators, preempting state regulation.

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Expertise from Government: When administrations change, the newly-elected president says no lobbyists or anyone from industry can enter government. Where, then, do we think the expertise will come from? There are plenty of people I know from the environmental community who lobbied for their cause but cannot get a job in this Administration, and really good people from industry who, if not recused from doing anything in the first few years upon entering government, cannot enter government at all to help apply their knowledge. So, that either leaves high donors or young pols who don't know anything to enter a new Administration. What a system!

Steven Pearlstein: I don't think hard and fast rules are the way to go. Presidents should be careful to appoint people to these positions who have so much invested personally and intellectually in a world view that they cannot be dispassionate, pragmatic regulators. But prior service in an industry or as a lobbyist should not automatically be disqualifying. It should, however, raise questions that need to be addressed in confirmation, or the selection process.

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Steven Pearlstein: That's all the time we have today, folks. Good discussion. "See" you next week.

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