RALEIGH -- Everyone in Washington professes to be looking out for Main Street these days. But the small business owners who create most of the jobs in America don't feel much love emanating from our nation's capital.
I have advised small business owners for 25 years. As a former U.S. Treasury official, my clients don't hesitate to share their views with me. I do not hear Main Street clamoring for stimulus dollars. Nor do I hear anyone promising to hire more workers just because Washington is offering them a tax incentive.
Rather, Main Street business owners simply want an opportunity to succeed without undue interference from Washington. And they also want something done to prevent another financial crisis, so they can operate their businesses with some semblance of predictability. The fact that no reforms have been implemented to prevent a repeat of the worst financial crisis of our lifetime is inexcusable.
The Senate and House are both tinkering with legislation that touches on a few constructive reforms, but Congress is so busy bickering over whether we need a new bureaucracy to protect consumers, it can't make any headway on real market reform. Not many experts have concluded that the meltdown of the global economy was caused by credit card companies jacking up interest rates on past due accounts.
The causes of the financial crisis are no mystery. Everyone agrees that there was an elephant in the room preceding the meltdown. There is an adage about blind men feeling an elephant, each describing a very different beast depending on which part of the creature he was touching, but this analogy is insufficient. The global financial crisis was not caused by a single elephant in the room. There was a veritable three-ring circus under way that won't be tempered with one-off policy prescriptions. We need comprehensive reform.
Let's start with a list of the problems that most would agree contributed - at least in some small part - to the financial crisis. My list would include, in no particular order:
Regulators were asleep at the wheel
Financial institutions lacked sufficient capital, and the capital many had could evaporate overnight
No one knew how many derivative contracts existed, including the firms that created them
The governance at many financial institutions, including the composition of their boards, was abysmal
Incentives were misaligned, rewarding Wall Streeters for gambling with shareholders' money
The government promoted mortgages for individuals who could not pay them back
The rating agencies were paid to ignore risk
Loose monetary policy added fuel to the fire
Several institutions became "too big to fail"
The list could go on. The point is that the magnitude of the financial crisis reflects the confluence of multiple systemic flaws. So preventing a repeat requires a muti-faceted response, not one-off populist proposals designed to punish overpaid investment bankers who have already forgotten the taxpayers' role in saving their jobs, regardless of how appropriate those proposals might be.
When served up in isolation, reforms such as the Volker Rule to prohibit banks from proprietary trading, and the administration's $100 billion surtax on banks, are easy prey for the bank lobby, which counters with the populist claim that any new restrictions or fees will inhibit their ability to lend.
Years ago, I was asked by the secretary of the Treasury to look into whether we should have federal regulation of insurance companies. That notion was instantly picked apart by lobbyists' populist arguments over federalism versus states' rights, with no regard for the evolution of financial markets.
Congress needs to recognize that financial institutions have become too interconnected for our current regulatory regime. Then perhaps a less fragmented regulatory framework for insurers like AIG could be one element of a comprehensive solution, along with a long overdue consolidation of the superfluous regulators who oversee banks and securities firms.
Proxy access, whereby large shareholders would be able to nominate director candidates who have some domain expertise, rather than just name recognition, has stalled at the SEC. But anyone who looks at the boards that were in place at Bear Stearns, Lehman Brothers and Citigroup can't help but conclude that corporate governance reform should be part of the solution.
And rather than Band-Aid approaches like a pay czar, why not make Say on Pay, where the owners have some oversight of executive compensation, a part of the reform package?
It is time for someone in Washington to present a reform package that is sufficiently comprehensive to convince Main Street that the real problems are being addressed.
Michael Jacobs served as director of Corporate Finance Policy at the U.S. Treasury Department from 1989-1991. He currently runs a mergers and acquisitions advisory firm in Raleigh and is on the faculty at the Kenan-Flagler School of Business at UNC-Chapel Hill.
