Ezra Klein’s review of Michael Lewis’ The Big Short points out,
But the existence of seemingly endless idiots at every level of the financial system is much more important than the frustration of a small handful of clear-eyed doomsayers. Like the poor, idiots will always be with us. In fact, we’ll frequently be among them. The seductions of group-think, the tendency to trust experts, the incentives for employees to go along with their bosses rather than contradict them and the need to deliver short-term profits even at the cost of long-term risk are more powerful than any regulation and will exist long after the visceral lessons of the subprime meltdown are gone.
So where do we go from there?
In this telling, the task for financial regulation isn’t making the financial system idiot-proof so much as making everything else financial-system proof — or if you can’t do that, at least making it less vulnerable. Reigning in the size and leverage and complexity of the financial sector such that its mistakes don’t pose a survival-level threat to the entire economy would be the obvious way to go.
FinReg isn’t as easy as it sounds, though. Ezra’s aware of this, as are most of the folks who blog about it. One barrier, and this is certainly this biggest problem, is the amount of lobbying money going from Wall Street to Congress to block financial regulation. However, there might also be another barrier in turning real financial regulatory reform into a populist issue. At MRZine, Chris Maisano quotes Richard Hofstadter’s The Paranoid Style in American Politics:
As a matter of interest politics, deficit spending might work to their advantage; but the moral and psychological effect, which is what they can really understand and feel, is quite otherwise
This is not a matter of idiocy in the general public, but rather, as Maisano points out
That’s because most people’s positions on economic issues aren’t based on objectively demonstrable criteria. They’re based mostly on non-economic values and emotions…If anything, as the economy and society seemingly become more complex and people’s ability to understand its workings becomes more circumscribed, it’s very possible that this general phenomenon will only become even more pronounced than it is now.
The CFPA has been well-framed so that it is aligned with both the economic and psychological inclinations of many Americans. How do you do that with financial regulatory reform? Leverage limits don’t have the same grab, and if former econ majors like me don’t even fully understand them, what hope is there? There hasn’t been a really broad effort to make real financial regulation a more salient issue, and so I fear that we won’t end up with much. Then the real idiots that Ezra and Lewis talk about, the ratings agencies and even the regulators, can help enable another big mess.