Who’s less rational–Washington or Wall Street?
National Review editor Kevin Williamson attacks the one-sided application of arguments about investor irrationality to justify government regulation of private markets:
The fallacy implicit in the conventional argument for more robust financial regulation is that animal spirits – the whole menagerie of greed, panic, pride, thrill-seeking, irrational exuberance – distort only profit-seeking activity. But they are at least as likely to distort efforts to regulate profit-seeking activity. In truth, the animal spirits of regulators probably are more dangerous than those of Wall Street sharks: Competition and the possibility of economic loss constrain players in the marketplace, but actors in the political realm have the power to compel conformity and uniformity among those under their jurisdiction. The entire economy is yoked to their animal spirits, and the housing bubble was a consequence of that fact. We have bred an especially dangerous hybrid creature in the “too big to fail” private corporation, the bastard offspring of a union between Wall Street’s animal spirits and Washington’s.
Williamson makes a good point. Politicians to do not soberly survey the landscape and objectively diagnose the causes of our financial ills. They are instead attempting to respond to and even anticipate outraged constituents. They’re also jostling with each other to have the most dramatic, headline-grabbing “deliverable” in today’s cluttered national spotlight.
The problem, according to Williamson, isn’t regulation per se. It’s the kinds of problems that regulations motivated by political “animal spirits” actually target:
Which isn’t to say that the regulatory enterprise is inherently hopeless: There are better and worse regulations, and there are more intelligent and less intelligent applications of them. But our legislators and regulators are much more likely to be swayed by their resentment of Wall Street paychecks than by well-reasoned analysis of our present regulatory defects, and we will solve “problems” such as CEO pay that are not, probably, problems.
Although Williamson’s caution is wise, he omits a critical distinction between the animal spirits of Wall Street and the animal spirits of Washington. The animal spirits that drive Wall Street financiers beyond the bounds of rational self-interest may not be outright greed, but they are likely to reek of individual interest and desire. Almost by definition, the animal spirits that intoxicate the Washington politician are likely to carry the scent of the common good.
That’s not to say politicians aren’t as much crass opportunists as investment bankers. They are. But politicians can only succeed when they convince the general public (or the subset of the public composed of their constituents). And that suggests that their self-interest is more likely to align with ours.
Executive pay may be the exception that proves the rule. The very concept of excessive compensation for individuals whose organizations helped precipitate the worst financial crisis in 70 years feels odious, especially to the millions of middle class Americans who are now struggling. The public zeal to attack this symbol of decadence provides incendiary ingredients to political animal spirits.
But even when those political animal spirits are at their most potent, they are far more likely to have the effect of providing new authority to regulatory officials and agencies who are not motivated by animal spirits. Pols may rail about executive pay, but the Treasury Department, the Federal Reserve Bank and others are using that energy to do much more.
This is a direction Wall Street may not travel of its own accord.