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McCain’s Moronic Critique of Cox

I’ve never really trusted John McCain on the economy. On this issue, he’s simply the lesser of two evils. Barack Obama knows what he wants to do to the economy and what he wants to do scares the crap out of me. McCain doesn’t know very much of anything about the economy but I’m counting on him to appoint somebody sensible to handle the economy while McCain goes off to do National Greatness stuff.

Unfortunately, McCain’s shortcomings with respect to the economy are on full display in his attack on SEC Chairman Chris Cox:

John McCain ratcheted up his increasingly populist language today, using a campaign event in Iowa to say he would fire Christopher Cox, the former Republican congressman and Bush-appointed head of the Securities and Exchange Commission.

McCain, grasping for the right tone to express outrage at the week’s financial meltdown, used his harshest rhetoric yet in an effort to distance himself from the unpopular Republican administration that has presided over the crisis.

“The Chairman of the SEC serves at the appointment of the President and has betrayed the public’s trust,” McCain said, reading deliberately from set remarks at a rally in Cedar Rapids.  “If I were President today, I would fire him.”

McCain didn’t mention Cox, a former member of Congress from California, by name, but laid the blame squarely at his agency’s feet.

“The primary regulator of Wall Street, the Securities and Exchange Commission kept in place trading rules that let speculators and hedge funds turn our markets into a casino,” McCain is to say. “They allowed naked short selling—which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground.”

There’s so much stupidity here, it’s hard to know where to begin. So in no particular order:

• There is very little evidence that stock market speculation has been an important contributing factor to the present financial crisis.


• Law abiding stock market speculation contributes to market liquidity, making markets more allocatively efficient.


• If the SEC is to be criticized for its handling of naked short selling, the agency should be criticized for caving to political pressure to ban the practice not for having been tardy in doing so. Short selling is a key component in maintaining market liquidity and naked short selling differs but little in this regard from standard short selling: “In permissible short selling, the party owed shares is the security lender (who used to own the shares before lending them for short selling), while the party owning the shares is the new buyer. In naked short selling, the party owed the shares is the new buyer, while the party owning the shares is (still) the current owner. The buyer in both cases is the same, so the price should not be different. The only difference is who acts as the effective lender of the security: in permissible short selling, the lender is the current owner; in naked short selling, the new owner acts as the effective lender. From a price perspective, it is difficult to see how that matters.” In short, the hysteria over naked short selling is, well, hysterics.


• Even if naked short selling were a problem, it is not in any way related to the present financial crisis: ” Repeat after me: The trouble is not with short-sellers. The trouble is not with short-sellers. The trouble is with an over-levered financial system built on a house of cards comprised of under-collateralized toxic paper that was applauded all the way up by “housing is the American dream” nutters who couldn’t see that vast expansions in thinly-traded credit are a path to economic ruin.”


• The uptick rule provided that a security generally could be sold “at a price above the price at which the immediately preceding sale was effected, or at the last sale price if it is higher than the last different price.” It was ineffectual in regulating short selling, did not prevent manipulation, and reduced market liquidity. It was a dumb rule whose time had come and gone. It died unlamented and unloved.


• There is very little the SEC could have done to prevent the present financial sector problems. Sub-prime mortgages, commercial banking practices, use of the Fed discount window, and so on are all way outside the scope of the SEC’s jurisidiction.


• Although I have criticized Chris Cox from time to time on specific issues, I have been highly impressed with his overall handling of the SEC. He is one of the moste politically astute Chairmen in the agency’s history, while also being very knowledgable on technical issues. Where he has done things I didn’t like, it has often been because Congress or powerful interest groups left him no real choice in the matter.

In sum, this is McCain at his worst. Populist. Hot tempered. Shooting from the hip.

Update: Chris Cox’s tempered but firm response is here.

Update: Some left-leaning blogs are criticizing McCain for the one thing he got more or less right. E.g., Blue Texan at Firedoglake, who demonstrates that it’s not just McCain who can make moronic comments by shooting off his mouth without knowing of what he speaks:

And McPalin’s really shitty week just got worse.

ABC News’ David Wright reports: At a joint rally in Cedar Rapids, Iowa Thursday, Republican John McCain slammed the Security and Exchange Commission (SEC) for being “asleep at the switch” saying that if he were president, he would fire Chris Cox, the chairman of the SEC since 2005 and a former Republican congressman.

Hellz yeah! You tell ‘em Maverick!

Except…

But while the president nominates and the Senate confirms the SEC chair, a commissioner of an independent regulatory commission cannot be removed by the president.

Bah. Since when do Republicans care what the Constitution says?

Ditto Steven Benen, who erroneously claims that “the president cannot fire an SEC chair. It’s procedurally impossible.”

The question is not one of the Constitution, but rather one of statute. “The creation, composition, and powers of the SEC are found in the Securities Exchange Act of 1934. The commission consists of five members who are appointed by the President with the advice and consent of the Senate. The terms of the commissioners are staggered and the basic length of each term is five years. No more than three of the commissioners may be members of the same political party. The statute does not provide for a chairman. Until 1950, the Chairman was elected annually. Following Reorganization Plan No. 10 of 1950 (see, Reorganization Act of 1949, 5 U.S.C. §§ 901-913), the President designates the chairman. Pursuant to this Reorganization Plan, the chairman succeeded to most of the executive and administrative functions of the commission.” S.E.C. v. Blinder, Robinson & Co., Inc., 855 F.2d 677, 681 (10th Cir. 1988).

The President’s powers with respect to appointment and removal of commissioners from the commission thus differ from the President’s power with respect to the appointment and removal of one of those commissioners from the office of Chairman. As to the former, “The Act does not expressly give to the President the power to remove a commissioner. However, for the purposes of this case, we accept appellants’ assertions in their brief, that it is commonly understood that the President may remove a commissioner only for ‘inefficiency, neglect of duty or malfeasance in office.’” Id. Whether the President could remove Cox from the Commision on one of these grounds is debatable, at best, but at least theoretically it’s possible.

What is not debatable, however, is that “The Chairman of the SEC serves as such solely at the pleasure of the President.” Harvey L. Pitt & Karen L. Shapiro, Securities Regulation by Enforcement: A Look Ahead at the Next Decade, 7 Yale J. on Reg. 149, 280 n.557 (1990). Indeed, the Tenth Circuit so held in the Blinder, Robinson case cited above. See 855 F.2d at 681, stating that “as the President has the power to choose the chairman of the SEC from its commissioners to serve an indefinite term, it follows that the chairman serves at the pleasure of the President.”

Hence, when McCain said “The Chairman of the SEC serves at the appointment of the President,” he was right at the very least insofar as Cox’s position as Chairman (as opposed to his position as a commissioner) is concerned.