Regulation versus Wealth

By Douglas Kohn

Kohn@Fordham.edu

For all the talk of implementing new regulations to tame finance, there are still elements of necessary deregulation that are being overlooked by the Federal Government.

The rules used to say that no one could get a mortgage unless they were able to pay 20% down on their home. This made sense, as the social consequences of having to later kick someone out of their home are more damaging than having large numbers of people not own their own home in the first place. This would still be considered “light touch” regulation.

America simply should restore the old regulation regime but consider deregulating in other areas. One of the most overlooked problems in America today is what the CPA Journal called “The Chilling Effect of Sarbanes-Oxley.” Sarbanes Oxley was passed (as usual, in a panic, with nobody reading all of the bill) in 2002 in response to the unusually large series of corporate scandals that came to light in the previous downturn. Included in these were Enron, Worldcom, Tyco and Arthur Andersen.

Arthur Andersen’s main role in that crisis was to be Enron’s auditor. This means they were an independent body hired by Enron to make sure the company’s books were clear of errors and to discover any possible fraud. As they did not do this correctly through both negligence and corruption, there was a crisis of confidence in the system. In response Sarbanes Oxley was passed to tighten auditing rules. An example of a new regulation was that CEOs had to sign off on the company’s financial statements and on the findings of their independent auditors.

The aforementioned regulation is not one of the more damaging ones, but the climate created by Sarbanes Oxley has made it grossly expensive for medium sized firms to go public on the stock market. The average cost of an Initial Public Offering (IPO) has reached $750,000. The result of this is that many American companies now find it easier (and cheaper) to bring their public offerings overseas, notably on the London Stock Exchange but to others as well.

Reform of Sarbanes Oxley is urgently needed to keep America’s medium sized firms competitive and able to raise money on the stock exchange for growth.

Dealing with Iran

By Douglas Kohn

Kohn@Fordham.edu

Fareed Zakaria this week made a very prescient call for patience with Iran. Iran is in every manner a threat to the United States and our allies in the region, but it is a manageable threat.

Iran’s behavior calls for increasing international isolation. The prescription for containing Iran should be as follows.

Sanctions should be in place as firmly as possible. The number one sanction that would do the most to destabilize the Ayatollahs would be to lobby Iran’s suppliers of refined gasoline to cut off supplies. Iran, although one of the world’s largest oil producers, lacks the capability to refine its oil supplies into gasoline. There is some debate in policy circles whether sanctions will turn the Iranian population against the regime or that their anger will be toward the West and outside powers in general for making their lives more difficult. Personally I think that the 10 days of protests that took place over the summer illustrate who the people of Iran blame for their problems.

Further security guarantees should be made by the United States to any nation attacked by Iran, or Iran associated affiliates. The United States should use the war in Afghanistan as a way to bolster our presence in the region, while drawing down in Iraq and staging war games that will send a message to the Ayatollahs.

Next, restarting negotiations between the Israelis and Palestinians is necessary to delegitimize Hamas and Hezbollah to take away Iran’s stellar reputation in the Arab street that it is the defender of the Palestinians (easier said than done, but it is only one part of the formula).

There is also another significant parallel to the end of World War II that should be realized. Nazi Germany, before it became a greater threat to the world in and of itself, was the main check on the expansion of Soviet Communism. The fact that Hitler eventually became stronger than the Soviets and embarked on a conquest of the world changed the circumstances and forced America to help remove him. Once the Nazi regime was gone, the Soviets had nearly unchecked power to force their no less barbaric ideology on the world.

Now America has removed Saddam Hussein from power, unleashing Iran’s revolutionary zeal on the Middle East. We traded the practice of dual containment on two small powers to now having to fill the gap left by one of the regimes (Hussein).

The final point is that we have been here before. In the 1940s there were calls to use America’s nuclear monopoly to rollback Soviet domination of Eastern Europe and uphold the Kuomintang’s war against Mao’s Communists. But it turned out that these extreme measures were unnecessary. As we have done in the past, we can wait out the Ayatollahs.

It is here, in Fortress America, that we will outlast them.