For all the bad rap multinational meetings on global policy get (I blame Kyoto), good suggestions do come out of them. Take for example, the recent meeting of banking officials in Switzerland organized by the typically impressive-sounding Basel Committee on Banking Supervision, where representatives of 27 countries agreed to buffer capital requirements for their banks. I’ve always believe that this was the single most needed requirement for any financial reform- an extra financial cushion for lending institution not only minimizes losses in the event of another similar financial collapse, but provides psychological security for potential investors, borrowers, and depositors. Which is, of course, why it is completely lacking from the U.S. financial reform bill.

Instead of capital buffers, more stringent lending standards, and mortgage lending reform addressed at the root of the problem, the U.S. simply threw more regulators and agencies in hopes that the geniuses at the SEC can oversee the financial markets as well as they monitored their pornography during the housing bubble. Nothing actually added to the bill gives me the sense that it solves the problems causing the crisis, and any policy even remotely controversial will be instead be “studied” by yet more bureaucrats. The government had a very good chance and public will to fortify financial systems for generations to come- and it blew it. Why?

Let’s start with the nature of large reforms: they are necessarily very complicated. As with health care reform and ongoing education reform, changes to industries that affect a large swath of society are notoriously tricky- any flaws or unintended consequences in your plans and regulations can negatively affect millions. Just ask China how “One Child per Family” is going for its bachelors who had their soul mates aborted 25 years ago. This is especially true for the finance industry due to the complex nature of securities and derivatives that befuddle even math Ph.Ds, as well as how even small deviations from predicted models can result in hundreds of billions of lost wealth. Therefore, it’s very hard to educate 538 people who are lawmakers and speechgivers by occupation in the nuances of financial markets, let alone the general public.

And as we’ve seen many times, politics is at its ugliest rears its head when it fills the void of ignorance in politicians and voters. During election season, politicians are desperate for a sound bite to sell to voters back home; “you lie!” sounds way sexier to voters, donors, and media outlets than “let’s discuss the potential impact of capital buffers on the operations of financial markets.” As a result, rational discourse and problem solving tends to give way to clichéd phrases about “creating jobs” or “government takeover”. This is particularly effective when nobody has a clue about how to solve or reform a problem, as is the case with financial reform. The result is that we have these guys trying to reform a massive, sweeping bill while threatened by the votes of these guys.

And how did this ultimately affect the financial reform bill? When pandering politicians of clueless, angry constituencies are deadlocked over a bill, what usually happens is that the bill is stripped of any meaningful- and therefore controversial- elements. Capital and lending restrictions? Gone. Mortgage reform? Bye-bye. Insurance fund in case of necessary bailouts? Nowhere to be seen. In the desperation of getting something done to show progress to voters, Democrats had to strip out of the bill anything that would anger the Republicans. The resulting bill is a shadow of what it should be and exactly what Republicans insisted it was- a mere expansion of government with no goal in sight.

What we’ve learned through this is that a mix of a complicated bill and a toxic political environment has watered down a potential landmark bill to near insignificance. In contrast, the Switzerland meeting was a handful of the brightest in the business crafting policy without a political agenda. And lo and behold, sensible policy came out of the meeting. It’s clear that when you write potentially society-changing laws, you want it written by people who know their stuff.

Therefore, I suggest that every complicated piece of legislation be written by policy experts and approved by lawmakers. To safeguard against corrupt and/or incompetent experts, I suggest that, in the event they fail, they have a “God is Dead” shirt put on them and be sent to a rural town in either Iran or Alabama to deal with the residents (close enough in intelligence and religious zealotry). That should be enough to motivate them to succeed. If that sounded stupid to you, consider that our current system where clueless legislators pandering to even more clueless voters write the rules doesn’t sound much smarter.


(Photo: nicolasnova)