Thursday, November 10, 2011

Do Libertarians Really Want To Trust Wall Street Bankers and Wild Cat Drillers

The U.S. suffers from too much red tape and too many regulatory burdens. Restoring economic growth requires freeing up business from the burdensome regulations that are restricting them. However, Wall Street bankers have proved that even with oversight they will take dangerous risks with other peoples' money via dicey loans, too much leverage, and flawed hedging strategies. And as BP's Gulf oil spill proved, oil and gas drillers can do enormous damage even when regulated.

Hydraulic fracturing (fracking) is one of the few drivers of the U.S. economy during 2011 and offers huge potential for growth. Replacing imported oil with domestically produced natural gas benefits both the economy and the environment. While there are cases in which fracking has polluted drinking water, the risks to water supplies from fracking have been wildly overblown. However, the disposal of the contaminated water, sand and chemicals used to blast natural gas out of deeply buried deposits of rock shale is a contentious issue. I strongly support quick implementation of regulations and inspections that ensure drillers do not leaving behind cesspools of polluted water or pollute water wells. Ramping up domestic gas production without doing irreparable damage to the environment requires reasonable regulations. Supporting a goal of ensuring that gas drillers take suitable precautions and clean up their waste water and chemicals is almost  unassailable. .

Is it really appropriate to trust Wall Street bankers to avoid taking excessive risks by freeing them up from regulatory supervision? While the criminal actions of Bernie Madoff and commingling of client funds by Jon Corzine get the headlines, the appetite of Wall Street bankers for excessive risk in a hunt for outsized profits needs to be held in check. It sometimes seems that they learned nothing from the 2008 collapse of Bear Stearns and Lehman Brothers. Wall Street bankers continue to use leverage to goose up earnings leaving them at risk of losing their total capital base many times over. They fail to adequately account for the counter party risk of their hedging with CDS's if there is no solvent party to pay them off. As pointed out in a Business Week article, just a single segment of the CDS market, the debt on the sovereign debt of Southern European nations, has put a number of the "too big to fail" banks at risk.

Further, while freeing up Walls Street bankers from over burdensome regulations such as Dodd-Frank is in the national interest, appearing to kowtow to the financial industry is terrible politics. The following rant from  The Big Picture sums up the attitude of a huge segment of U.S. voters.

OWS also might not have come to pass had financial institutions, in particular, not forgotten who bailed them out a mere three years ago and returned so quickly, and with such belligerence, to their bad behavior and bonus-happy ways. A bit of humility would have gone a long way with the American people, but none was forthcoming. As with all of corporate America, the needs of the shareholders, followed closely by the needs of the corporate executives, trumped any need to be decent corporate citizens. The “heads we win, tails you lose” mindset is still very much with us.

In addition to the need for selected segments of the economy to be regulated, there also is a role for the Federal government in restoring growth to the U.S. While the infatuation of the Obama administration with solar energy has been well documented (solar energy is not scalable enough to meet a meaningful percentage of U.S. energy needs), there is an energy technology with tremendous potential for playing a major role in reducing carbon emissions at a cost that may be competitive with coal. If your reaction is similar to mine, upon digging into Thorium reactor technology, initially you will be skeptical that the claims are way to good to be true. However, I have yet to find an expert to debunk them. If the potential for Thorium reactors is anywhere near the claims of its backers, it is crazy that the U.S. government is allocating so much spending to solar and nothing on Thorium reactors. Thorium reactors may offer a good example of an area where the U.S, government can play a pro-active role in enhancing the economy.


In general, U.S. voters have a strong libertarian bent. Playing the libertarian card is good economics and good politics. However, libertarian principals can be taken way too far when it comes to implementation. Smaller government with less regulation is a winning position. But the single digit popularity of the Libertarian Party demonstrates that American voters' appetite for reducing regulation has it limits. .

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