Well, at least we're talking about new financial regulations now

The Treasury announced a slew of new regulations for financial institutions. I'm not enough of an economist or policy wonk to really judge how well they would work, but I am skeptical, for at least a couple of reasons. First, obviously, I don't have a lot of faith in any kind of proposal on regulations of the financial industry from this administration. Second, this came up very quickly after the Bear Stearns debacle. It's clearly been in the works for a while, but it also seems to me that at this point it's probably more of a PR thing than a serious proposal. Bush & Paulson & Co. know they have to at least LOOK like they are doing something. Sounds like the key players aren't buying:

As Treasury Secretary Henry M. Paulson Jr. on Monday formally laid out an ambitious plan to overhaul the regulatory apparatus that oversees the country’s financial system, senior lawmakers and lobbyists from industries opposed to the plan predicted that most of it would be dead on arrival.

Paul Krugman is not impressed. No surprise there.

"it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive."

The key issue is actually fairly straightforward. Banks, like Citibank, Wells Fargo, etc., the kind where people put money into a normal checking account, are regulated by the federal government. In return, the government guarantees deposits, up to certain limits. This is a result of all the bank failures during the Great Depression. The federal government is kind of like a parent: you live in my house, I pay for the roof over your head, you play by my rules.
Investment banks, on the other hand, don't have the same kind of regulatory oversight. So they can make deals and buy and sell stocks and bonds and commodities and derivatives and all kinds of exotic financial instruments without the constraints that regular banks have. But they're not guaranteed by the feds like the banks. More freedom, but more risk.
Bear Stearns changed that, because Bear Stearns's survival, such as it was, was backstopped by the government. So now the investment banks, or at least one, are moving back in with the parents. They very well need the money that only the federal government can provide. And they clearly need the kind of supervision that only the government can provide. Will that happen under the current regime? Krugman, of course, is not optimistic, given the track record:

"The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry."

I'm going to be following this. There are a couple of political implications up front: Chris Dodd is the key player in the Senate, and Barney Frank in the House. I'm very glad both of them are on the case, I have a great deal of respect for both. Dodd is an interesting player, because, as the Senator from Connecticut, Wall Street is in his backyard, and there are a lot of Wall Street types among his constituents. So he might come across as a Wall Street guy. But he won a lot of street cred taking on Bush over wireless wiretapping, so liberals will probably have faith in him. And you just have to listen to Barney Frank talk policy to realize he's brilliant.

How to lose $900 million

You've got to feel sorry James Cayne, the chairman of Bear Stearns. He was once worth a billion dollars.

But on Thursday, Mr. Cayne, the chairman of Bear, disclosed that he had sold all of his shares in the troubled investment bank this week for just $61 million.

Well, maybe not too sorry.

[F]or Mr. Cayne, the liquidation evokes a deep sense of loss.

Well, yeah. But still not feeling too sorry.

To the end, Mr. Cayne heeded the advice he often gave his colleagues at Bear: hold on to your stock. Whether the stock was flying high, as it was early last year, at $171, or plummeting, as it did in recent months, Mr. Cayne kept the vast bulk of his 5.6 million shares.

OK, sympathy gone. How stupid is that? As long as I can remember, a basic principle of investing is do not put all of your eggs in one basket. Diversify. That's why most people have not just several different mutual funds in their 401(k)'s, but different kinds of mutual funds. And yet this guy, head of an investment bank, and therefore allegedly a very savvy investor, did not follow this very basic advice. He might claim that keeping all of his stock is a sign that he has faith in his company. But it's also a sign that he's not a good investor. And if he has that much faith in his company, he's an egotist. No one is perfect. No one is that good. With the possible exception of Warren Buffett. Who, it should be pointed out, has his wealth tied up in Berkshire Hathaway. But that company is itself a great example of diversification of investments.

The Contradictions of Conservatives

Andrew Sullivan notes a trend in response to Obama's speech:

This controversy really is separating the thoughtful and hopeful conservatives from the others. I can't believe I'm writing this, but it seems to me to be helping conservatism reform itself as well.

I am not surprised. As with every ideology, conservatism has its contradictions, and I think we are witnessing the breakdown of conservative ideology along one of its fault lines. I don't think it's entirely coincidental that this breakdown among political commentators is happening at the same time that we are witnessing radical failure on Wall Street - I think there's a strong parallel.

Liberalism went through its own version of this split years ago. Classic liberalism encourages individuals to place as much, if not more, importance on the community as on the individual. There are good things about this, obviously - we work together to solve our problems. But too much of a good thing is a problem: if there is not enough incentive for individuals to take responsibility for themselves, or if there is no reward for individual initiative, the community is not renewed and enriched. Thus communism died in 1989.

The conservative version of this is the mirror opposite: conservatives sometimes place more importance on individual initiative than on collective responsibility. Thus they reward individuals for success, while bemoaning government intervention. The contradiction here is that collective action is required for individual achievement. Bill Gates is wildly successful in part because he is an American, working within the American system of the rule of law. Many conservatives understand and appreciate the fact that the community is ultimately more important than the individual - no man is an island.

But some conservatives resist this, and what we are witnessing now is a split between those who accept the responsibility of individuals to advance the larger cause of democracy, and those who place their own interests first, unless they have little or no choice in a particular matter. Bear Stearns is a classic example of the latter. It did not participate in the communal effort to save Long-Term Capital Management, despite pressure from the Fed to do so, and despite the fact that other investment banks were doing so. It marched to the beat of its own drummer.

Of course, Bear was also part of a crowd that has pushed for greater deregulation for years. Part of the rationale is based on hubris, the belief that the market collectively knows how to police itself better than the government. Bear believed that it understood the rules of the game better than the bureaucrats. Unfortunately, it didn't. Most other investment banks and financial institutions understood this better. Which is why JPMorgan is buying Bear - they understood that the rules are there because the community is ultimately smarter than any single individual or even company. The rules we live by are a product of the collective wisdom of the community.

We are witnessing the same split in reactions to Obama's speech. Some conservatives have recognized that this is a call to embrace our collective responsibility to each other. Some, on the other hand, see it as a demand to put the interests of one group - African Americans - over another - whites. They put their own interests ahead of the community, so they see Obama as doing the same. Thus Pat Buchanan is bitter that blacks are not grateful to white people. To him, it's a zero-sum game - either white people get jobs and scholarships, or black people do. One wins, the other loses. Bear Stearns believed that it could win consistently enough that it did not have to participate in maintaining the standards of the community as other banks did. This is called hubris. When it turned out to be wrong, few people had sympathy for it. They gambled and lost. The irony is that Bear now does not want to take responsibility for losing its gamble.

But Obama believes, and many conservatives fortunately agree with him, that this is not a zero-sum game. White people do not have to lose for blacks to gain. On Wall Street, this is called adding value. A bank loans a homeowner money to buy a house. The homeowner pays it back, with interest. The interest represents added value for the bank. But the price of the house eventually exceeds the price the homeowner paid for it, so they sell it and make money. This is their added value. Everybody wins. For this system to function properly, however, the rules of the game have to be clear and fair. Which is only possible with a properly regulated market.

In politics, this is called the progress of democracy. Everyone benefits from being part of a democracy. But everone also beneifts differently. Some benefit greatly and become fabulously wealthy. Some only benefit marginally. But we have a collective benefit from all people having opportunity to benefit. And therefore each of us has a responsibility to ensure that everyone has as much opporunity as possible, and is treated as fairly as possible. Many conservatives understand this, and they recognize Obama as someone who understands it as well. Each of us has a responsibility to make sure that the system works. Those of us who have benefited the most from the system have a greater responsibility to ensure that it works properly. Barack Obams himself is a great example of this: he has benefited from the system to a great degree, and has accepted responsibility to ensure that it works properly.

The conservative coalition is splitting between those who acknowledge the importance of advancing the cause of collective responsibility, and those who want to act according to their own best self-interests. Thus Chris Wallace gets into an argument with his colleagues at Fox News. And Pat Buchanan makes absurd arguments about the need for black people to express their gratitude towards white people.

This contradiction will not be resolved in this election. But it will make for a fascinating debate.

This is bad

JP Morgan is buying Bear Stearns. For $2 a share. This is not a firesale. This is a volcano sale. Or whatever is more intense than a firesale. JPMorgan is paying $236 million. That's chump change. All of the marble and artwork in the Bear Stearns HQ is probably worth several million. Apparently Bear Stearns was effectively bankrupt last Thursday. So JPMorgan is basically buying the physical assets, they're not even paying for any of the cash that Bear has in its bank accounts. They're not paying for that cash because, apparently, there isn't any. The price is at a 93% discount to the price of Bear's stock at the Friday close. That is just unheard of. Even Enron took a while to completely collapse. JPMorgan is doing the world a favor buying Bear. They are keeping the world's financial system from going kaflooey. I don't know much about how Bear Stearns is integrated into the financial system, but if it went bankrupt, more than a few people would panic.

Things are going to get worse before they get better. There will be more than a bit of schaudenfreude at work here, as people who don't work on Wall Street take a certain perverse pleasure in watching people in expensive suits lose their jobs.

This may have an interesting effect on the Democratic presidential race, because Hillary, after all, is the Senator from New York. And that ain't going to be a good thing in the immediate future.

This will be one of those times which test the fiber of American democracy. I have a theory that the system of American democracy is designed to sustain the maximum damage that can be inflicted on it. Because everyone in this country has, theoretically at least, an equal opportunity to participate in the system, everyone has, again theoretically, an interest in preserving the system. This will be one of those moments when people with a vested interest in the system are going to have to band together to protect some elements of it. This will not threaten the existence of this country, but it is going to have a much wider impact than many people suspect at the present. This is going to be bad.