Spitzer Told Us So

Less than a year after resigning as New York's governor due to his scandalous involvement with a prostitute, Eliot Spitzer has emerged from political exile to put in his two cents about how to prevent another economic meltdown. While one is tempted to tell the disgraced, former crusader to go back to his cave, the problem is his critique is right on target!

In an op-ed last month run by the Washington Post and Newsday, “Capitalism Needs Some Rewiring,” Mr. Spitzer identified three “structural” problems for President-elect Obama and Congress to tackle, citing “misconceptions about what a 'free market' really is, a continuing breakdown in corporate governance, and an antiquated and incoherent federal financial regulatory framework.”

In particular, his take on our supposedly “free market” resonates with me, given the fact that whenever government takes its eye off the ball, the players start making up rules as they go along–or play with no rules whatsoever. They end up ruining the game for everyone, leaving Uncle Sam to clean up their mess.

“For long stretches of the past 30 years, too many Americans fell prey to the ideology that a free market requires nearly complete deregulation of banks and other financial institutions and a government with a hands-off approach to enforcement,” wrote Mr. Spitzer. “Those of us who raised red flags about this were scoffed at for failing to understand or even believe in 'the market.'”

He noted that when, as state attorney general, his office “warned that some of American International Group's transactions were little more than efforts to create the false impression of extra capital, we were jeered at for attacking one of the nation's great insurance companies, which surely knew how to balance risk and reward.”

He added that “when the attorneys general of all 50 states sought to investigate subprime lending, we were blocked by a coalition of the major banks and the Bush administration.”

He wrote that “time and again, those who tried to enforce the basic principles that would allow the market to survive were told that the 'invisible hand' of the market and self-regulation could handle the task alone.”

However, he concluded, “no major market problem has been resolved through self-regulation, because individual actors care only about performing better than the next guy, doing whatever is permitted–or will go undetected.”

He said that “those who truly understand economics do not preach an absence of government participation. A market doesn't exist in a vacuum. Rather, it's a product of laws, rules and enforcement. It needs transparency, capital requirements and fidelity to fiduciary duty. The alternative, as we are seeing, is anarchy.”

I agree with Mr. Spitzer on this one. The “no harm, no foul” mentality is fine when playing basketball in the schoolyard without a referee, but running an economy under such a philosophy leads to the kind of chaos we're enduring today.

Mr. Spitzer concedes that “mistakes I made in my private life now prevent me from participating in these issues…” What a waste! Washington could use his considerable intellect and legendary persistence to help reform our out-of-control economic system, abused by far too many who should have known better.

Of course, President-elect Obama, with his open-minded “Team of Rivals” approach to governing, might one day forgive Mr. Spitzer his past, mostly personal transgressions and put him in a position to make a difference once again…perhaps as a National Insurance Superintendent, should Congress ever approve federal regulation.