How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

This is a great piece -- I highly recommend reading the whole thing.

But there is one important reform -- perhaps the most important of all -- not discussed in the essay. The authors mention (near the beginning, in fact) "bringing back pressure from outside Wall Street to mind its own enlightened self-interest". I don't think this foundational point was ever fully addressed. Telling the regulators to "be more regulatory" doesn't cut it.

What we need to do, first and foremost, is once again separate money from speculative investing (and the speculative element of the banking system), and do away with the automaticity of entrusting of the public's money to Wall Street. Public pension funds should be dramatically limited in their ability to invest at all -- mostly they should be sitting on a pile of money. It should be illegal (not the default) to put people's retirement money in stocks (even stock indicies) unless they opt-in (with heavy disclaimers). And here's the biggest one: we should return to sound money, backed by gold and/or silver.

Most people today (especially financial types) would cry in response "but hard money is too restrictive, and gold and silver don't grow, they just sit there!". Well, I think what we want is for the speculators' access to our money to be more restricted. And yes, gold and silver just sit there -- but their purchasing power gradually rises in concert with economic progress (this is why the dollar gradually rose in value from the founding of the US Republic till about 1913). In other words, if people put away savings backed by gold and silver, they will likely actually have enough to retire on in one working lifetime! Without "investing!"

Investing should be something done only with a "super-surplus" of money -- not as society's default choice. This is not ultimately as restrictive as it sounds: since savings even under a hard money situation are typically deposited in banks, they are re-lent and become investment. But as the banks are not given any special help or guarantees from the government, they are a lot more careful about how they invest. And they know that people don't "need" to entrust their money to them at all.

There's a reason they call it "sound money."

Beyond that, I didn't see Einhorn and Lewis mention another major huge problem with the regulatory regime: the overt rewarding of managerial failure through repeated bailout actions and failure to enforce. Bailouts aren't just the tragic consequence -- they set a low bar for future behavior. And why do executives in the current tragedy (as well as most) generally get to keep their winnings? If the winnings weren't real, the paydays shouldn't be either -- going back as far necessary to square things.

A hard money/sound money system would go a long way (perhaps most of the way) towards fixing our system. This is because the discipline of such a standard -- if it is to be meaningful at all -- attacks most of the Wall Street and regulatory incentives at critical points. Wall Street doesn't get investment funds from the public automatically. Banks don't get deposits unless they can show they are nearly as safe as money itself. And Government has to keep reserves at reasonable levels and not debase or allow banks to debase the currency, otherwise it will begin to lose gold to foreigners.

Speaking of which, I think we can now look back to the last time that (losing gold) started to happen to the US -- the late 60s and early 70s -- and finally realize that we took the wrong fork in the financial road when we went to a fully fiat currency and "financialized" economy.



taps65 at 02:45 2009-01-05 said:
This is from the people, for the people and by the people.


mortgagemess at 07:27 2009-01-05 said:
Sorry but we the people have been all but forgotten. When CEO's no longer have a vested interest in making a company better since they all negotiate NFL style contracts that pay them millions for non performance. When money managers are able to scheme Wall Street and trick investors into losing it all. When the Harvard Mafia took over running this country. When non recourse became a part of the american financial system. When the people we elected to represent us gave away a $700 billion dollar jackpot for free. When people in this country can now have conversation at the dinner table about who is the most underwater. When the American Dream of owning a home became a nightmare for those that worked hard to achieve it. When loan modifications are given away to only a select few while others watch their home slip away. When seniors are tricked into losing their home and feel suicide was the only way out.

America wake up..we are a socialist nation that has returned to the days of aristocratic class. Where the haves are able to flaunt their wealth beyond several generations of spending and the rest of us are left to toll in the fields for survivial... Permalink

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