Although everybody claims to love the market, nobody really likes the rough-and-tumble of competition that produces the essential “creative destruction” of capitalism. At bottom, this abhorrence of competition and change are the common theme that binds together the near death of the American car industry, the collapse of the credit market, the implosion of the housing market, the SEC’s disastrous negligence, the Madoff Ponzi scheme, and the other economic catastrophes of recent months.
Consider the examples of the SEC and GM, which would appear to have nothing to do with each other. The traditional critiques of the SEC have been that it was underfunded and didn’t have up-to-date laws needed to regulate sophisticated financial transactions in evolving markets. That’s not accurate. The SEC is a gargantuan bureaucracy of 3,500 employees and a budget of $900 million—vast compared with the offices that actually did ferret out fraud in the marketplace. And the general investigative powers of the SEC are so broad that it needs no additional statutory power to delve into virtually any market activity that it suspects is improper, fraudulent, or deceptive. After each business scandal (Enron, Wall Street analysts, Madoff …), the SEC claims a need for more money and statutory power, yet those don’t help. The SEC has all the money and people and laws it needs. For ideological reasons, it just didn’t want to do its job, and on the rare occasions when it did, it didn’t know how.
GM’s excuses—that its UAW contract and health care costs make it too top heavy to compete—are partially true but ignore a simple reality: These are the self-inflicted wounds of a company that chose a path of least resistance rather than confront the need for dynamism and innovation. GM and its brethren forged a partnership with the UAW that avoided difficult choices on legacy costs, because the world seemed to permit it. Similarly, they opposed meaningful reform in health care. While this approach may have been tolerable in the ‘50s and ‘60s, it made no sense over the past 30 years. The auto industry preferred protection to competition. And when it had to compete, it wasn’t up to the task.
Both the SEC and GM refused to adapt from the world of the last century to the more dynamic new millennium. Each reacted the same way to competition: Instead of improving its product, it played defense. Instead of genuinely asking how it had missed structural flaws in the marketplace that cried out for investigation, the SEC repeatedly joined forces with major Wall Street banks to handcuff those who had discovered the market failures. No one at the SEC seemed to ask the most important question: Given how the market is changing, what should we change to insure the integrity of the capital markets?
Instead, the SEC spent its energy preventing others from doing the work it should have done. Using the rather arcane doctrine of pre-emption, the SEC fought in the courts and on Capitol Hill to keep other enforcers at bay: Apparently, worse than having fraud in the marketplace was the possibility that an entity other than the SEC would appear to be more effective than the SEC at finding it.
The auto sector was similar, avoiding or opposing the innovations that would generate consumer excitement. For both the SEC and the auto industry, Congress was a place to find protection from meaningful competition. Each used its bureaucratic clout to insulate itself from the pressures of capitalism. Both the SEC and GM have lacked the nimbleness to realize that the market was changing beneath their feet. Each found it easier to continue doing the same thing over and over and to reward those who made the same product, or kept the competition from marketing a better product, rather than themselves creating a better product.
The result has been unfortunate: Over and over, we supplied the protection from needed change that these entities desired. Then, when the going got tough, neither the SEC nor GM was up to the task. By preventing the stern taskmaster of competition from forcing adaptation, we became complicit in their becoming dinosaurs.
The contrast to the real marketplace, where a company like Apple has to reinvent itself every product cycle, is remarkable. GM and the SEC need the Steve Jobs mentality. It doesn’t matter that the SEC is a government agency. Instead of focusing on cookie-cutter processing of minor claims, it needs to value creativity. It needs to move fast so that tipsters will feel that their information will be acted upon, not shuffled up in triplicate to a committee that eons later may read and discard it. Both GM and the SEC need to see a change in market conditions as an opportunity—not a challenge to market share.
We must rebuild these two institutions. If we don’t infuse them with a culture of change and love of competition, they will fail once again. The SEC should go out and hire some of the young, recently laid-off traders from hedge funds and investment banks. They need work, and better than any group of lawyers or agent-investigators, they know what trading patterns and practices to examine and where to drop subpoenas to find the skeletons. The SEC should welcome the creative tension that results from having state regulators or other federal agencies such as the CFTC on the beat. And GM should use government funding for green technology to truly transform itself: It should build the infrastructure for plug-in technology that will be the next iteration of “gas stations.”
This is a unique opportunity for President Obama and the Congress to take two seemingly different entities and force them to play by the real rules of capitalism: compete and transform to produce better products.