Financial Melt Down

Lots to write about as we ease into the New Year.  Of course, there is more than enough material on the economy.  But first, this just in, the financial system upon which ours and the global economy is based, is in a melt down!

Yesterday, in the New York Times Michael Lewis wrote a fantastic piece focused on the lack of regulatory oversight on the financial markets: banks, hedge funds, the stock markets.  It is, in my opinion, a must read.

Two salient points in his article.  First, something we have all known, but the revolving door between government and the industries (we saw this a lot with high powered Senators and Congressmen becoming lobbyists for the very industries they used to legislate) government regulates is a huge problem.  Lewis focused primarily on the Securities and Exchange Commission, but this regulator becomes highly paid employee routine exists in all sectors, not just finance.  It goes without saying, but Lewis drills in the point, that regulators are loathe to enforce when they know they will be seeking lucrative jobs from the very industries they are monitoring.  In the case of the financial sector, particularly the risk markets such as stocks and securities, the enforcement of regulations has become, according to Lewis, a joke.  Unfortunately, it became a very very scary joke as we now are having to deal with all the failures.

Because of the cozy relationships between regulator and regulatee, Lewis maintains the SEC has become more about protecting "predator" corporations from the public rather than the public from predatory securities schemes.  My aside to that reflection is that it is true for much of government regulatory agencies.  If you can afford a lobbyist presence in Washington, DC, you have more access to government "protection" than the rest of us.

Second, and in my opinion the more important point made by Lewis, was the emphasis over the past two decades on corporations short term gains.  The incentives for CEOs, boards of directors, and managers, is to work toward quarterly profits rather than long term health of the company much less (and this is my gripe not Lewis's) producing anything of lasting value.  And when you're driving for immediate results, you of course tend to do things which are not in the best interests of anyone other than your own wallet.  

It seems to me that the current melt down is an opportunity to re-build the whole mechanism, not just tinker trying to instill confidence.  I'm not sure, frankly, we can instill confidence in something so broken.  I am also not sure layers and layers of regulation are the answer, but I do think we need to enforce the laws we have.  At the risk of sounding harsh, it seems to me the enforcers failed.  Do they still have jobs?  Are they still monitoring banks, companies, the stock market?  In any other situation, if there was such a large and massive failure, jobs would be lost.  So, let's get new people in those positions, someone who ensures they do their job, and Congressional oversight to make sure the boss is actually accomplishing something.  But we also need to re-think how we want corporate America to act as well as how we save, borrow, and lend money.  

In the meantime, real people are enduring real pain.  If we don't spend the time, now, working on re-building, you can bet we'll be looking at the smoldering rubble again.