Posted by
grad_1986 on Thursday, November 05, 2009 5:47:52 PM
I was at a zoo a few years ago and went to go see the monkey exhibit. Upon arrival we saw that the exhibit was closed because workers were busy installing a new fence. Talking to one of the workers I asked him why a new fence was needed. He exclaimed that the fences need to be redone about every 3 to 4 years as the monkeys who are very smart animals find ways to get out. I asked if there was anyway to stop them and he said, "Oh yeah, years ago we could just electrify the fence to keep them from trying... but today that is considered to be too cruel. But this also keeps the fence makers in business (he joked)"
I think the same argument can be said about much of our own country. We shy away from people being punished for their own actions. Whether it's a kid who doesn't want to study for his tests to get good grades; or it's a home buyer that got in over their head with a variable interest rate mortgage; or it's an insurance company that made risky investments into derivatives. We don't let natures own consequences take place. We often call it "intervening" or "bailing out". But whatever you call it, we seem bewildered when we keep getting the same problems occurring over and over and over again.
I was listening to Armstrong&Getty on the radio a few days ago and Joe Getty made the statement, "Stupid should hurt". They were talking about people who made bad decisions with their life (drugs, alcohol, dropping out of school etc..) and how these people were able to eek out an existence on the government dime. They had no incentive to improve their lives and they were content for the rest of us to pay their way for the rest of their pathetic life. They were like the monkeys that had no incentive to stay away from the fences. They would keep trying to get out until they succeeded.
Pain is a wonderful solution to most of what ails our country. For example, the peril of having your company go bankrupt is what keeps most companies from being derelict with other peoples money. Removing that consequence is like removing the electricity from the monkey-cage fences. You now suddenly are left with the need to constantly re-build the fences by adding more and more legislation and restrictions to keep the possible offenders from going where you don't want them to go. And like the monkey's in the cage, you won't find out about the problem until it's too late and the damage has been done.
I believe you would have to be a complete and utter fool to think that you will be able to stop Wall Street with another set of regulations and governing boards. Do you really think that Bernie Madoff is the only Ponzi scheme out there? The problem with Wall Street has never been about regulation, its all about RISK. Where there is high risk, there are fewer and fewer fools wanting to go there. Take away that risk and you have an unlimited amount of fools placing their bets. Risk is what makes capitalism work and its how capitalism regulates itself. Some of course will get burned in the process, but we will all collectively learn a lesson from them. Reducing the risk of injury only perpetuates the problem (I once read an article that said risky driving has increased with the advent of driver and side airbags as more drivers feel more and more invincible behind the wheel).
Of course it seems we need refresher courses on these primcipals from time to time. In 1929, we learned that if you want to invest in the stock market, you need to do it on your own dime and not someone elses. Back then, people were investing by using "margin" (using loaned money from the broker) to buy stock. The risk was low to these investors as it wasn't THEIR money they were risking. We learned that lesson and stopped this ugly game. But now here were again 80 years later only to find out that Congress had changed the rules again and allowed this practice once again.
The changes we need to make to keep bubbles like the one we just came through from happening again, are not more regulatory boards and regulations. No! What we need to put back into the capatilistic system is a good dose of RISK. We need to:
1) End the options market, especially short-sales (a system of making a legal "bet" on a stock going DOWN in price rather than UP).
2) End the derivatives market (buying on margin) so investors have "skin in the game" (their own skin of course).
3) Take away "investment insurance policies" that large investors take out to hedge their bets that their investment decisions go south.
4) Allow all companies to fail no matter how large they are. Out of their rubble, better and more reliable companies can rise.
This last fix, brings up a point I would like to make. In nature, forest fires are not only destructive, but actually necessary. Old tree growths become weak and prone to disease and insects. It is necessary for forest fires to burn them down on occasion so their pine cones can be burst open and have their seeds spread to make new trees. Allowing the old trees to live would eventually lead to the death of the forest as disease can wipe out the forest , with no new trees to take their place. So also with capitalism, recessions like the one we are experiencing now should allow poorly managed companies (usually old and rigid) to go under, thereby allowing younger and more pliable companies to take their place. Bailing them out, as we did, will only put off their inevitable destruction. And like the forest, killed off by disease, we won't have the seeds (money) to rebuild the forest.
In conclusion, risk and consequences are the electricity we need to add to the fences of our market system. Unless we do that, no fence (set of regulations) will ever be enough to keep the market-monkeys in.