posted: September 11, 2021
tl;dr: Our politicians’ financial interests should be aligned with the country’s interest...
Federal Reserve Bank of Dallas President Robert Kaplan is but the latest powerful U.S. government insider to face public criticism for performing what is today a perfectly legal activity: trading stocks on the basis of information he possesses due to his high-ranking position and policy-making role in the government. (Note: even though the Federal Reserve Bank is technically owned by private sector banks, it was created by the government and is for all practical purposes part of the government.) Speaker of the House Nancy Pelosi, whose husband is an investor, has faced withering criticism for investing in companies who would benefit from legislation she is working to pass. There are even websites devoted to tracking the stock trades made by our elected and appointed servants. At least the politicians are subject to disclosure requirements.
The way the system is currently set up, our politicians get to front-run the citizenry by investing early in companies they know will benefit from legislation and policies that they are implementing. To cite just one example from thousands, Pelosi and her husband have placed a large bet on Tesla, whose profits are hugely dependent on government legislation, as I described in this post on government-centered startup businesses. In 2021, the federal government is heavily involved in managing the economy: by setting the rules and regulations for all sorts of industries and markets, and by making specific choices of companies to favor with government contracts. Our politicians, by running the government, are picking winners and losers. The current system allows them to profit personally from their actions, by gleaning profits from other investors who are unaware of what actions the politicians are taking.
My solution: while our politicians and high-ranking government officials are in office, they and their immediate family must convert their assets, aside from an owner-occupied house, into government securities: U.S. Treasuries, Savings Bonds, and/or Federal Reserve Notes. They’d probably choose to put most of their wealth into U.S. Treasuries, to earn some interest while in office. What could be a more appropriate security for a U.S. government official to hold than the one that is backed by the full faith and credit of the United States? They would be betting on the U.S.A., not on a billionaire entrepreneur’s car company. When the politician leaves government service, they can sell their U.S. Treasuries and Savings Bonds, and use the cash to buy whatever they want
This proposal forces our politicians to have “skin in the game” while in office. As the country and its securities do well, they will do well. It’s similar to what top executives in corporate America are expected to do. The C-suite residents may have some other investments in non-competing companies, but they are expected to hold a significant fraction of their net worth in company stock while they are an executive. It’s similar to what many investment funds do: the people who run the funds often have a major portion of their own wealth in the funds they are running. It aligns the interests of the decision makers with the interests of the other constituents of the institution, who lack decision-making authority.
Some people say the solution to politicians' insider trading is to force them to place their assets in a blind trust while in office, so that they lose the ability to choose where to invest. I think this doesn’t go far enough. I don’t want our politicians to invest in corporate America, I want them to invest in America, period. Our country has several popular securities that are perfectly fine ways to store assets. While our politicians are in office and helping to guide the government, their financial interests should be aligned with the country’s and the people’s.
Might this proposal discourage people from remaining in government for long periods of time? One can hope. It shouldn’t discourage those who truly want to serve, but it will hopefully discourage those who want to “do well by doing good”, i.e. make themselves a lot of money by leveraging their power and access to information for their own benefit at the expense of other investors. U.S. Treasuries are supposed to be the safest, most liquid “store of value” on the planet, Savings Bonds are equally safe, and Federal Reserve Notes are cash, and cash is king. By holding these assets our politicians would only be foregoing the additional financial returns they would (perhaps) get by investing in stocks and other assets. If they don’t like this proposal, then they should explain precisely what they do not like about the government’s securities and why they do not want to hold them.