Well, here they go again, as RWR would say. 

Tom Campbell gave this tutorial in a recent campaign appearance in Oakland, California.   For the few political junkies actually paying attention at this early date, Campbell, a former US Congressman and Dean of the Cal Haas Business School, is running for Governor of California.  Tom Campbell is stunningly competent on matters of economic theory (PhD with Milton Friedman), and he's put this in to successful practice within government service at almost every level.  He also has legal knowledge of the highest caliber.  For my tastes, he might hit the books on reputation theory, behavioralism, and a few other newer topics, but his foundation on the basics of monetary policy and his rejection of the cynical fallacy and false hope of applied Keynesianism and academic marxism is irrefutable.

His sensible politics aside, Tom Campbell has a resume that could land him at the helm of any university in America.  This makes Tom Campbell a very valuable asset to the Republican Party, which at its apex held a small but devoted coterie of academic luminaries, a significant band of silent fellow travelers, and a solid majority of those that passed through institutions of higher learning. Today, with Joe the Plumber more articulate on economic matters than its 2008 Presidential standard bearer, the party's academic credentials need serious burnishing.  Outside the party, potential allies range from the sensible sophisticates (Marginal Revolution, Reason, Cato, Heritage, AEI, etc.) to the strident blunt instruments (Rush, Hannity, etc.), whose capacity to persuade those other than the foregone is limited.

Given the growth in government financing of higher education, and the unsurprising drift toward statist ideology and conformism, it is unlikely that the Republican Party will ever be the belle of the non-hard science academic ball.   Still, the party ignores academia at its perils, and it needs to do everything it can to elevate and embrace sensible academics to positions of prominence.  Ronald Reagan went to a modest college, but he had WF Buckley and Milton Friedman to help light his way.

The conundrum remains:  can Tom Campbell reach out to a broad enough audience with his ideas to make a difference?   Jack Kemp he is not.  I have these words of advice.  Plato and Aristotle had little good to say about the rhetorical slight of hand employed by the sophists, however, their teacher Socrates admitted the Sophists were better teachers than he on linguistic weapons.   Clinical truth and elucidiation is fine for monks, but charts and graphs didn't get Ross Perot very far, and a mastery of emotion and the dark arts of language is required to persuade the assembly.  He may not be a star football player or an action hero, but Tom Campbell might aspire to Harry Potter.

Geithner's latest on bank compensation continues a long line of fallacious thinking when it comes to effective regulation of the financial markets.  Realizing that talent will flee TARP because of compensation rules, they are considering using the financial crisis as an excuse to regulate compensation at non-TARP banks, as well.

As readers of this blog are aware, the entrance and subsequent exit from the secondary market for subprime synthetics by the government sponsored entities (Fannie and Freddie) and the abject failure of the government franchisee NRSROs to accurately rate residential mortgage securities was a primary contributor to the Freeze of '07 (and Crash of '08). 

The shadow credit quality market that developed in credit default swaps certainly had transparency and manipulation issues, however ultimately these instruments reflected asset changes and weren't assets themselves.

No market can remain effective when you stick $2T of fraudulently labeled securities in it, and this fraud was unsurprisingly facilitated in large part by government-sponsored actors.    Meanwhile, the job the government should have been doing -- the cop on the beat to keep markets transparent and honest -- was not being done.   Martha Stewart was just too big a risk to pay attention to that petty stuff like trillion dollar mortgage synthetics fraud.

So now we have a wave of promised regulations not dissimilar to Sarbanes Oxley and the Spitzer Rules that are informed by little more than the pablum of weekly talk shows and the musings of people profoundly ignorant of financial markets and what they need  in order to work effectively.  

Coming from a decade + of experience, I have fairly extensive thoughts on the best way to compensate people at investment banking firms.  Certainly, you should not compensate people for underwriting fraudulent securities, and bonus clawbacks should be considered by the firms and their shareholders -- BUT NOT by the government.

Also, if all the grand schemes and dreams of the new Spendocracy depend on confiscating wealth from people who the free market pays more $250K to, then the Spendocrats better make sure they have some people who can make that money to tax.

Richard Posner has had a long and distinguished career.  After his confusing and disjointed article in today's Wall Street Journal, I recommend that he spend more time on his fishing and less time on writing.

Capitalism is about (a) the sanctity of private contracts and (b) safeguarding by private and public means honest, transparent, and liquid markets for those contracts, and (c) the hypothesis that such markets will generally do a pretty darn good job at price discovery.

Another observation of most capitalists is that the government makes a pretty bad counter-party.  Why?  Because of the doctrine of sovereign immunity, government actors have a pretty big incentive to lie when they can.   Tough to have an honest, transparent market when the rules don't apply to one of the actors.  Second, government regulators, however well intentioned, operate under a landslide of well-documented cognitive fallacies.

So, what about the Crisis of '08 represented a "Failure of Capitalism?"   The $2T of falsely (arguably fraudulently) labeled securities (contracts) at the heart of crisis were labelled by 3 government monopoly licensees.   Over half the market of these fraudulently labeled securities was made by hyper-levered government sponsored entities (Fannie Mae and Freddie Mac).  Arguably, the insurance products that backed these synthetic securities were the product of capitalist, albeit highly regulated, enterprises.   But without the implied government guarantees, would these contracts have been written?

If capitalists made one incorrect assumption in this process, it was that the government would be a reliable counter-party.  But when the GSEs abruptly pulled out of the sub-prime synthetics markets after the accounting scandals of 2004-2005, this proved to be false hope.  The resulting collapse in the secondary market and frozen liquidity situation precipitated the crisis we know all too well now.

But this was a failure of cronyism, not capitalism.  Perhaps some time with this will reorient you.

DISCLOSURE:  I have worked within the past 18 months with David Weild, former Vice Chairman of Nasdaq, and others who have contributed to the recent NVCA "4 Pillars" report.  I am also a managing director at a publicly-traded investment banking firm.  The views expressed here are strictly my own and do not necessarily reflect those of my employer.

Do you want the Country (and Obama) to succeed over the next decade?