Initial ideas about the new financial regulatory regime are getting floated in the press. Perhaps not surprisingly, a lot of the material seems similar to the Group of 30 recommendations.

This all sounds pretty good to me. My main comment, though, would be that we shouldn’t put too much confidence in any regulatory regime. One of the things we’ve seen recently, I think, is that there’s a bit of a paradox around these kind of regulations. If they have any teeth, then there’ll be people who stand to make money from relaxing them or from finding and exploiting loophopes. And if they work, then for a long time there won’t be any major problems. And if you go for a long time without major problems, people are bound to get complacent and start not caring that loopholes are being exploiting. Indeed, they’ll start seeing the loopholes as a reason to relax the regulations. And then eventually you get a blow-up and a renewed interest in regulation.

Long story short, one of the big things we were missing heading into this crisis was not just prophylactic regulation but any clear guidelines for what happens if things go bust. One of the main virtues of the FDIC process is simply that it’s a well-understood crisis. FDIC regulations don’t always work, but bank failures on an FDIC level don’t lead to “bank panics” anymore because everyone understands that the FDIC has a process in place and is comfortable for letting it unfold. We need, I think, some more general prescription for what’s supposed to be in the box if the Fed Chairman or Treasury Secretary needs to reach behind the “break glass in case of emergency” barrier.

Via Tyler Cowen, a paper from Thomas Philippon and Ariell Reshef that I’m not sure I fully understand:

We use detailed information about wages, education and occupations to shed light on the evolution of the U.S. financial sector over the past century. We uncover a set of new, interrelated stylized facts: financial jobs were relatively skill intensive, complex, and highly paid until the 1930s and after the 1980s, but not in the interim period. We investigate the determinants of this evolution and find that financial deregulation and corporate activities linked to IPOs and credit risk increase the demand for skills in financial jobs. Computers and information technology play a more limited role. Our analysis also shows that wages in finance were excessively high around 1930 and from the mid 1990s until 2006. For the recent period we estimate that rents accounted for 30% to 50% of the wage differential between the financial sector and the rest of the private sector.

Floyd Norris has a worthwhile writeup. I think the basic picture is that the crash should do a lot to reduce inequality. And also that in principle we should be able to achieve a post-crash return to growth that’s not so dependent on wealth trickling down from the titans of the financial sector.

Comes from Kevin Murphy’s slides here. I think he overstates the deadweight loss effect and is working with the wrong conception of “efficiency” for these purposes when he claims that government is inefficient, so the odds of a stimulus being successful therefore aren’t as bad as he indicates. And this doesn’t change the fact that I haven’t heard any better ideas than doing a big stimulus. But this is a sobering reminder that a big stimulus doesn’t guarantee success—very hard work needs to be done on making sure that stimulus funds target genuinely idle resources rather than diverting non-idle resources while leaving the idle ones as idle as ever.

Ed Glaeser has an interesting post on what he terms “the case for small-government egalitarianism” which goes off into a stimulus detour, but which is more interesting on more enduring issues. He observes that “Political divisions have not always pitted big-government egalitarians against small-government conservatives” but today things are different, and not necessarily for good reasons:

Current American political discourse labels people as either anti-government or pro-equality, but wanting to help the poor should not require the abandonment of sensible skepticism about expanding the size of the state. Many of my favorite causes, like fighting land use regulations that make it hard to build affordable housing, aid the poor by reducing the size of government. In the wake of Hurricane Katrina, I also argued that it would be far better to give generous checks to the poor hurt by the storm than to spend billions rebuilding the city, because those rebuilding efforts would inevitably help connected contractors more than ordinary people.

These are well-taken points. And I think it’s both true that people who think of themselves as progressives (the kind of people who think industry shouldn’t just be allowed to pollute willy-nilly, the kind of people who think it would be smart to have a universal health care system) should give more emphasis to these issues and also true that people who think of themselves as conservatives (the kind of people who think income tax rates are too high) should give more emphasis to these issues.

Still, the idea of “small-government egalitarianism” strikes me as a slightly confused concept. The argument seems to go something like this:

1. Egalitarians often favor government programs that boost equality and regulations to reduce harmful externalities.
2. Some government programs and regulations are actually just the rich and powerful further enriching themselves.
3. Underpants gnomes.
4. Egalitarians should really be libertarians!

There’s something fishy happening in step three. Contrast “small-government egalitarianism” with ordinary modern American liberalism. When a modern American liberal thinks a government regulation or public spending endeavor would accomplish an important public purpose, he’s for it. But not otherwise! Dean Baker, for example, is one of our foremost defenders of Social Security but also the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer which you both can and should read for free online.

Baker’s book is full of ideas that a “small-government egalitarian” ought to be able to embrace—it’s all about policy proposals to eliminate or reform government interventions in the economy undertaken on behalf of the rich and powerful. He doesn’t happen to tackle the pet issue I share with Glaeser—land use regulations—but it’s very much in that spirit. At the same time, Baker’s just a regular-old liberal. Nothing about his egalitarian dislike of bad government programs forces him into dislike for good government programs. Modern American liberalism isn’t a mirror-image of modern libertarianism and it doesn’t have an a priori commitment to government intervention in the economy on a particular scale. I think it’s completely fair to charge that people who call themselves liberals are sometimes mistaken about the desirability of particular programs or regulations, but that’s a different issue—lots of people are mistaken about all kinds of things.

All that said, with the Cold War over and the conservative movement tending to take most of its emotional succor from a blend of militarism and homophobia these days, I hope that modern liberals and libertarians can find ways to cooperate on some of these economic issues where our interests may overlap.

I asked yesterday what it was stimulus-skeptics thought was more likely to work. Tyler Cowen offers his answers and Alex Tabarrok offers his. My sense is that the Obama administration is doing—or going to do—all three of the things Cowen suggests, though perhaps not on the scale he wants.

Joe Nocera has a column whose headline is “First Bailout Formula Had It Right.” The early grafs certainly tend to support that headline and feature Nocera talking about how key it is to get “toxic assets” “off the books” of our banks. But as we read deeper, it seems to me that he’s not talking about a return to the initial TARP plan at all, he’s talking about selective nationalizations.

To recall the difference, in either case the government acquires toxic assets from banks, thus restoring the banks to health. And then the government manages the assets and sells them off for something greater than $0 but almost certainly not enough for the taxpayers to avoid a large loss. This then restores the financial system to health, and prevents us all from losing even more than that through endless economic suffering. But in the TARP I scheme, the “toxic assets” come “off the books” of privately-held banks because the government just agrees to overpay for the assets. This leaves the shareholders owning a good bank and the government owning a bad bank. The government then gets to sell off the bad bank’s assets eventually. In a nationalization scheme, the government takes ownership of the entire bank and then splits it into a “good” bank and a “bad” bank. The good bank is then re-privatized (getting the taxpayers some money) and the government then gets to sell off the bad bank’s assets eventually.

In terms of the broader economic logic—the diagnosis of what’s wrong with the economy and what’s needed to fix it—these are similar ideas. But in terms of the implications for the owners of equity in financial service firms, the implications are very different. And in terms of the implications for middle class taxpayers, the implications are very different. The joke part of it is that the “capitalist” way involves huge government subsidies to rich people, whereas the “socialist” way involves people who made bad business decisions suffering losses.

The first-ever Secretary of Commerce was William C. Redfield who took over in 1913, the first year that the Department of Commerce and Labor was split into the present-day Department of Commerce and Department of Labor:

Redfield did this and that for a number of years before moving to the then-independent city of Brooklyn. He appears to have been an opponent of Brooklyn’s incorporation into New York City. In 1896, he joined many so-called “Bourbon Democrats”—conservatives—in opposition to William Jennings Bryan’s capture of the party nomination on a free silver platform and served as a delegate to the rogue convention of Gold Democrats that mounted a third party campaign against Bryan and eventual victor William McKinley.

He ran for congress as a Gold Democrat and lost. He was Commissioner of Public Works in Brooklyn in 1902-03 and made it to congress for the 1911-1912 term before getting the Commerce gig. As Secretary, he inaugurated the tradition of undistinguished people serving without distinction in this not-very-important job.