Ethics laws can’t work

By Felix Salmon
October 22, 2009
Richard Painter, who drafted and approved the ethics agreement signed by Hank Paulson when he became treasury secretary, has come to the conclusion that such agreements can never really work as intended:

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Richard Painter, who drafted and approved the ethics agreement signed by Hank Paulson when he became treasury secretary, has come to the conclusion that such agreements can never really work as intended:

This essay concludes that government ethics law in its current state is not up to the task and that the United States is not prepared to implement bailouts in a manner that will instill public confidence. Although these problems could be alleviated through stricter ethics rules or a more systematized approach to bailouts, most solutions would be more costly than the problems they attempt to solve. Bailouts thus impose a substantial burden on government ethics that may be impossible to remove, in addition to the economic cost bailouts impose on taxpayers. Designing a bailout free economy may be the only acceptable alternative.

Painter’s essay is excellent, and highly recommended, precisely because he offers no solutions to what is an intractable problem. Here’s a little bit:

Requiring Treasury officials coming in from Goldman Sachs or other investment banks to dump their bank stock and stock options may not have been enough when they retain close ties to their former employers. There were also probably too many senior Treasury Department officials from Goldman; perhaps there were too many from the banking industry in general.   

This is very true. The saga of the government’s response to the financial crisis is one where all the key decisions are made by bankers, be they of the commercial, investment, or central variety. In a parliamentary system like the UK’s, the finance minister is an elected representative of the people. Of course, as we’ve seen in the UK, that doesn’t necessarily make bank bailouts any more taxpayer-friendly. But at least it serves as some kind of check on the banking industry bailing itself out whenever it gets into trouble.

The impression I get from the current spate of crisis books is that the likes of Paulson and Geithner became entirely consumed with the problems in the financial sector, and viewed political considerations, and the will of the people more generally, as an obstacle to be overcome rather than as any kind of guiding light. That may or may not have been a good thing. But either way, it’s fundamentally undemocratic.

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Comments
3 comments so far

Felix:
Your post bristles with populist fury at the Treasury. I’m a longtime reader and I know that you have had spurts of “pile-on regulation” rage, but this post doesn’t read as well crafted as your others.
For instance, you mention that the UK has an elected finance minister suggesting that this is what you wish. But then you don’t tackle the likely questions that arise from that. Off the top of my head: how is America to decide what experience is necessary for the job? Either a professional academic like we have at the Fed or a practical banker like we have at the Treasury. I think we still end up with the same result whereby the Treasury officials come from the private banking sector.
J. Daniel Wright
demandequilibrium.blogspot.com

Actually, this raises the most fundamental problem: can you have a functioning democracy with the inequality in income that currently exists?

In 1970, an SEC enforcement attorney could live in Manhattan and afford to take vacations with his buddies from Princeton. His salary was 60% of the salary of his friends in the private sector, but real estate was cheap, and he had a great set of benefits.

Today, that pay differential is more like 300% at age 40, and that smaller salary cannot pay for anything in Manhattan, and puts even paying for a private university education for the kids at risk.

And the businesses being regulated are far more complex. So how does the SEC keep and maintain the talent to regulate the industry? It can’t.

And the motivation of the SEC attorney? Well, it’s to find friends in the industry to get the next job – the one that will pay for retirement. So bottom line, ethical behavior is against the fundamental interests of the SEC attorney.

We are all Colombia now.

Posted by dollared | Report as abusive

The problem is that everybody is focused on creating laws and ethics policies. Once those are in place, everybody then focuses on finding the tiny loopholes so that the behaviour that is clearly intended to be thwarted, is announced as passing the legal and policy requirements.

Paulson setting up a “social hour” with his old cronies without setting out clear ground rules that no government policy would be discussed means that he really did not udnerstand the concept of conflict of interest in the first place. With the recent Galleon and other affairs, it is clear that things that Main Street America view as way over the line are either viewed as acceptable or marginally unacceptable on Wall Street and in Washington.

Posted by rd | Report as abusive
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