Financial Reform: Support and Resistance Indicators

Analysts discern the practical model being used for the development of public policy by identifying patterns and relative levels of support and resistance.

As the congressional debate proceeds on financial reform following the crisis in 2008, both parties are predictably poised to define the problem as the solution.

Democrats argue their reforms will end the too-big-to-fail organizational ontology that commands government bailouts. The Republican party, in faux opposition, contends proposed reform will "institutionalize government bailouts."

Equity valuations for large banks are getting support because the probability that any reform will end the too-big-to-fail model is virtually none.

While the Republican critique is correct, the party's solution to the problem is to stand in opposition to reform. The overall effect is to support the problem (and the associated equity valuations).

The entire reform process is in a prima facie state of regulatory capture to conserve the economy-of-scale modeling that consolidates wealth and power.

It is no coincidence that Wal Mart, in the midst of the recessionary trend, has now surpassed Exxon-Mobil at the top of the Fortune 500 list of largest companies. Consolidation into economy-of-scale "efficiencies" both precipitates the recessionary trend and validates the value of the efficiency.

As long as the means of consolidation is conserved, subsequent measures to counter its negative effects and support an economic recovery, like a more progressive tax code by letting the Bush tax cuts expire, for example, are rendered ineffective. The recessionary trend (unemployment) and equity values get support while a less accomodative monetary policy is resisted. Cheap money is available to the too-big-to-fail banks through the discount window to finance mergers and acquisitions (the economy of scale efficiency). The problem is supported, the solution is resisted.

A persistent recessionary trend will then be blamed on a progressive code and a value-added tax will be installed to finance the deficit in Hamiltonian fashion (with a regressive tax burden).

Since the tax on the value added is included in the consumer price, the tax increase will be regressive and deflationary (reducing demand), supporting the recessionary trend and the budget deficit while resisting higher interest rates.

The type and strength of support and resistance strongly indicates a persistent stagflationary trend that supports an arbitrage economy with high volatility, expertly engineered to favor firms that are too big to fail and a system of finance designed to generate profits without employment or economic growth.

While the reform debate correctly identifies the problem to be solved as organizational, it critically fails to identify that being "too big" is the determining variable. The practical model in operation is decidely, then, not pluralistic.

If analysts and policymakers rely on the pluralistic model for a predictive utility, the model will predictably fail.

Being organized "too big" will predictably fail the model of pluralism.

Government bailouts are necessary to avoid the catastrophic consequences of conserving the Hamiltonian model in a post industrial society.

The solution is to finance a more pluralistic model, not a more consolidated one.