Much of the nation's government is in need of overhaul, many of the rules, laws, commissions and systems that have grown up over the years are in need of drastic revision and updating to take into account the global reality, and the changes in American life. Consider that when the SEC - the Securities and Exchange Commission - was created, only a slender slice of the American public owned stock, and most didn't even indirectly own stock through a pension or other investment program. Whole Life Insurance was one of the wider vehicles, a product that has virtually disappeared.

The problem with Bush's first two Secretary's of the Treasury is that they had no credibility on this issue. Paulson however, does have credibility on this issue, and has announced a major speech on his vision for changing regulation

Securities overhaul is, for me, a bread and butter issue. Current regulations have not been able to stop massive fraud in corporate accounting, massive irregularities in corporate finance and massive imbalances in corporate governance. In no small part, it is because the motto of the last 24 years - and Clinton is not exempt from this criticism - has been "Laissez les bons temps roulez" - let the good times roll. As long as the stock market was making new highs, and the world was muscling to get into US equities, little else really mattered.

Over the last 5 years however, US equities have not been an attractive investment. It is something I have warned on repeatedly. Other than one brief burst after the Iraq Invasion, US equities, measured in Euros, Pounds and Swiss Francs, have been essentially flat. For developed markets, Japan, London, Paris, Frankfort - and my favorite Switzerland's SSMI - have been better investments. In fact, for large stretches of the last few years, you could have done better betting on eurobonds and against the dollar. For developing markets South Korea has long been a favored pick

Oddly, one of my exceptions has been investing in exchanges themselves - the boom market in finance means that exchanges have been going public, and their stocks have crushed almost all competition. To heck with tech, the leading productivity sector over the last 15 years has been equities trade. Invest where the productivity is they have pricing power.

Into this environment steps Paulson, who understands at a visceral level that to finance the massive trade deficit that we have, one of two things has to happen. One is a program of public investment that would shift production from internal consumption to export. That is, the US has to stop acting like a third world country that is getting a jolt of hot money investment. But that's not going to happen, and Paulson, while he might have some public investment ideas, is only going to push it in certain areas. No the other way, the way we have been doing it, is to sell more paper to buy all of that oil.

The problem is that money goes where there is risk adjusted return. RAROIC - Risk Adjusted Return on Invested Capital. The US doesn't come close to being the best place for this in today's world. The Asian Central Banks may stash their collateral in Treasury Bonds, but over time, investors are going to go where the action is. The action is in Private Equity, Derrivatives, Collateralized Debt Obligations, and on other nation's exchanges. Major Chinese issues have gone public in other places, because the hurdle to listing is lower. Paulson knows the IPO game, and sees how the US is losing out on fees and fat commissions and underwriting profits.

Now if the US were a better regulated exchange system - a gold standard of accounting probity and the greyest of the grey suits - we could continue to give companies a harder time. There is a reason why listing on Shanghai isn't very prestigous. It has to do with the "C" word, and I don't mean Capital. However, the US has been home to a string of large corporate scandals, or has been the enabler of them. Computer Associates, MCI-WorldCom, Adelphia, Enron and the back dating options scandal which is causing a wave of restatements are the tip, of the iceberg.

This is why overhaul is needed. Either the US needs to get with the program and restore the luster of the US regulatory system, or we need to race to the bottom to match the wild west atmosphere elsewhere, and hope we can leverage our position as the world's biggest pool of idiotic financial losers - er, I mean, the world's most robust source of consumer spending - to stay ahead. This is something that the upper echelons of the economy need.

Enter the Democratic Congress. They should know that this overhaul is not optional. Many things can be delayed until 2009, getting on this is not one of them. Which means two important things. One is to get it right in terms of how it is done, the other one is to make sure that the constituencies who just sent the Democrats to power get something out of it. So what does Securities Overhaul for the rest of us look like?

Let's admit for the moment that defined benefit pensions are dead for most of us, there are about to become a sign of being a very valuable member of a company, a perk given out to executives, rather than a staple of hiring. This is because they have been looted already, and companies can't use benefit arbitrage - that is, use their size to buy a benefit cheaper than employees could, and thus offer it in place of wages. The difference - between what the worker could buy with the money, and what the company can buy, is the profit to the corporation.

Let us then look at 401k performance. Guess what, Mr. and Mrs. - but particularly Mr. - 401k are dumber money. They underperform the indexes, defined benefit pension plans, and in many cases social security. That's right, people would be better off just buying more social security than investing in many cases. Now their being dumber money has been very profitable, as more nimble and well informed players make bets about where the money is going to flow when Mr. and Mrs. 401k arrive at the party, and then gouging them for it. And it has got to stop.

You see, while Mr. and Mrs. 401k are dumb money, they aren't dumb people. They have realized that they were getting the shaft in stocks, and so poured money into something closer to home. Their houses.

This has been great for profits - as Americans thought they could consume their way to being rich - buy house, buy improvements for house, sell to some sucker and head for Arizona. It's like drinking your way to sobriety. Instead of Americans getting most of that money - though some have retired and made out very well - have been homebuilders, mortgage companies and the real estate industry. Real estate is a casino, and it is the House, not the house, that makes the money. Throw in property taxes, that have helped states, and the payoff for most Americans has been dismal. Worse still, many borrowed against the supposed value of their house to consume. This has been inflationary, keeping up prices that should have been falling and keeping corporate profits fat. As I said, Robust Consumption Behavior, see illustration under Ovis aries.

In short, the present misregulation of the securities market has exacerbated both retirement and domestic consumption problems. The worse American consumers do at saving for retirement, the more they are going to go to the government and post-hoc fix things. Right now the game is "spend down and go one medicare for nursing homes". This will be part of a wave of getting the government to make up for what years of investing poorly do to a person's portfolio. By pumping up domestic consumption, it has also accelerated offshoring and exacerbated the balance of trade problems. People consume and buy oil. We import that. They consume and by home goods. We import much of that too.

The Democratic Congress needs to make sure that when they go after Securities Overhaul they address the problems that have made this so. So what are the key points that they should be looking for. The right believes that people should learn from bad decisions, and like Milton Friedman, recently departed, they believe that ordinary people should be given as many chances to make really bad decisions as possible. This doesn't hurt the over all economy much, after all, one man's shearing is another man's wool - but it does alter the distribution of effort. And when effort can either lead to importing or exporting, and balance of trade matters, the mesöeconomic effects are important.

The liberal idea is that people should get a chance to make their own choices, but that intentionally bad choices should be banned, since they are "rent seeking behavior" and are a waste of effort. Bad choices should also be labelled as bad choices loudly enough so that people who insist on being self-destructive at least know this. And preferably at their own, rather than other's, expense. Republicans want the reverse - they want people to bend over, lube up, and then be stuck in Chapter 13 forever. Of course, they should still pay their God Taxes.

As liberals we should want the following aspects of regulatory overhaul? Since it is going to be driven by a shift from "rules" to "principles" here are four that need to be among the foundation stones.

First, Corporate Democracy. There is a strong correlation between bad corporate governance, and lack of corporate democracy. When a few control the money of many, there is a temptation by the few to treat the corporation as a pigg bank and their jobs as the quest for a hammer. Corporate Democracy is good for investors. Investors own the company, they are buying stock. Instead, for most small investors, shares are "junk bonds in drag".

Second, Fundify. Every financial vehicle should be capable of becoming a generically available fund. Right now many kinds of investment, including private equity, are not open to most investors. Many kinds of fund organization are created specifically to enter regulator black holes. Instead, everything should be one the table. More access to buying means more demand. With PE buy outs in the 10s of billions, it is not just for the club any more.

Third, Accountability. If there is any single problem with the accounting scandals, it is the lack of real accountability. Features such as "pro forma" numbers, back dating of options and so on, are merely symptoms of the lack of accountability of CEOs and others to their investors. Corporate Democracy would improve this, but there is also the need for better regulatory oversight. Better does not necessarily mean more cumbersome and intrusive. this is where principles, rather than rules, comes into play. Substantial compliance, rather than dotting "I"s and crossing "T"s is important.

Fourth, an End to Manipulation. Companies regularly manipulate both results and guidance, in order to be able to "beat the street" and create spikes that their executives can sell into. This behavior does not improve the performance of the economy.

Going hand in hand with this overhaul should be an overhaul of 401k programs and all other forms of retirement savings. We need people to save and invest more, but as long as we treat the small investor as a pocket to be picked, they will, rationally, not do this. The ability to borrow against retirement savings should be expanded to prevent bankruptcy, and the means by which investors invest should be dramatically altered. One simple step would be to allow any American who wants to to contribute to a national defined benefit pension system which would be the one offered to Federal Employees.

In the "doing it right" catagorey, there are some simple steps. One is merging regulation into three bodies - the SEC, the FDIC, and the Federal Reserve. Merging other bodies into the same rules making framework would reduce difficulties in harmonization, and in application. Another "doing it right" step would be to create a program similar to the FDIC for protection against investor fraud. That is, in case of Enron, the Insurance would pay out some fraction, though by no means all, of the lost invested capital, again, not paper, but real losses. This step will get cries of "No!" from those who want Securities overhaul to be another name for turning Wall Street into the Strip, but in fact it would help restore the position of the United States. Other countries, as well, have had scandals of corporate governance and speculation. By placing a small charge on each trade - and exchanges are making money hand over fist, they can easily afford it - it would be enough to create an insurance pool. More over, it would create an incentive for the government not to allow scandals to fester, since the result would be a government bail out. Bad for business all the way around.

To balance these, a dramatic streamlining of listing procedures, a single, far easier, system of access to becoming a broker/dealer, and far less cumbersome reporting and filing requirments, plus the creation of a free wire system which would make announcements to the public required by law, such as for public offerings, as well as integrating hedge funds and derivs into the regulatory scheme will go a long way to oiling the wheels of Wall Street. Particularly the offerings step - which is causing the US to lose IPO business.

Finally global harmonization of exchange rules is coming, because global trading is coming. Alternativss to exchanges are are growing up, and bourses are going to flower around the world as capitalism spreads. Building in harmonization as a goal is essential so that differences in regulation are not used to create opportunities for imbalance.

Getting this one right is going to take time, it will occupy a great deal of the time of the next Congress. There is no reason to jump the gun and pass either proposals for "real time" reporting, nor for race to the bottom deregulation. However, misregulation, which is what we have, is as much of a danger as disregulation. The US needs to take a lesson from Japan, which steadfastly refused to clean up its banking and equities system in the wake of the 1987 crash. This has been a contributing factor to the long "Bright Depression" of very low growth and rigidity in their investment structure.

It's also an accomplishment that the Congress can take to voters and say "we are cleaning up the system." And that plays well in that other market place, the market place of politics.