Comments on the current crisis

I just canceled my subscription to the New York Times. I did it for two reasons. First, I’m cutting back on every possible expense following the melt down in the equity markets, and second it seems foolish to support an institution whose editorial policy is hell bent on further reducing what’s left of my assets. They are not doing it directly of course, no Times reporter has shown up at my door with a gun, badge and warrant demanding cash, but every day they are at it indirectly through calls for vast regulation and control of Wall Street.

While I will not miss the Times’ “anything those men are doing must be wrong” news coverage I will miss David Brooks’ column, the one bright ray in an otherwise tainted and bitter institution.

This week Brooks wrote about the near impossibility of government regulators anticipating a banking crisis like the one we are going through, even with advanced tools like counter cyclical reserving and microscopic ALM transparency.

I believe he is right, but given that the media has been driven into a psychotic incoherent rage, first over the popularity of Sara Palin (“How, How! HOW! could those those Republicans have a popular woman candidate!!!! How dare they! We had our own media created farce, and now they have one that’s better! Bastards!”) and then by the incomprehensibility of a credit crunch they really don’t understand but are absolutely convinced was done deliberately by people richer than they, to this there will be only one tolerable response: Criminalize more behavior.

That’s what regulation is, right?: Define certain activities as worthy of state sponsored sanction and damn it, just jail the greedy bankers, whomever they might be.

And then the regulations will flow, but to no avail. Brooks points out that no regulator would have ever called a halt to the expansion of sub-prime lending that over-inflated housing prices and led to this crisis in the first place, because it would have meant saying out loud “don’t lend money to the poor”. Political populist regulators would just never have done that.

And citing Megan McArdle’s article in The Atlantic, Brooks says it’s hard to say the relaxing of banking regulations during he Clinton administration in any way added to this crisis, so why should we expect that adding regulation now would make it any better. In fact the relaxation of banking regulations back then may well be the way out as brokers saddle up to commercial banks to survive, something they could not have done prior to the Clinton de-regulation.

But deep, complex regulation is probably the course we will take, which is too bad. We’ll do it if for no other reason than more and more of our population is beholden to the government for their jobs and those jobs are dominated by procedural regulation. Government sector jobs are at an all time high and take some one in three of our workers out of the economy. Add to that employees in institutions that are not really in the business of wealth creation (universities, artists, journalists, blog writers…) and you get fewer and fewer people who ever had to make a payroll or who’ve run anything larger than a protest rally. To them, more regulation seems a good and natural course.

But regulation carries its own problems, basically because human designed structures are incapable of anticipating the vast complexities of natural systems, and economic markets are vastly complex natural systems that will defy all check list regulation. In fact, they find ways to thwart it, and that’s the new risk we are going to face, yet the coming deluge of regulation is inevitable.

It’s inevitable because people are angry, and probably a little jealous. Heck in the past few days I’ve had some really nasty things to say about the bankers downtown myself. These are very emotional times.

With more and more of our citizens working outside the wealth creation part of the economy, essentially living off the surplus of a shrinking commercial class, and people being very mad, it will be hard for us to resist the tools of institutional control prevalent in their world. More regulation, probably more “do this, then this, then this” checklist regulation, will be a’comin’.

I just hope we can use cooler heads and realize that for regulation to work it needs to be more comprehensive and less specific. Unfortunately I believe we will fail because that is exactly the opposite of how the non-commercial sector of our country thinks.

Thanks, New York Time’s for teaching us to think that way.

In my next post I’ll describe two regulatory changes that actually make sense.

More from on the Financial Crisis

Congress to America: Drop Dead

Are Americans worthy of being saved?

Comments of the current crisis – Regulation

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