Things seem to have gone astray. I hope this can pull it back where it belongs.
Everyone here knows I'm a devout capitalist with capitalism's best interests at heart. I want it to be successful while preserving it's participant's dignity. There is no valid reason that Marx and other doomsayers have to be right. Capitalism is an economic system that can grow wealth across the board. Wealth empowers us to achieve the things we dream. It does not have to crash and burn on the rocky shores of human frailty. This is what I believe. We have an opportunity in the making to achieve a measure of success over our own self-destructive tendencies (i.e., greed). Anyone with an interest in economics is aware that regulation is the current focus of business and government around the world. [[All quotes are from an opinion piece by John Kay in today's Financial Times, all parenthetical expressions are mine.]] Both sides of the divide -- to regulate or not -- have good and bad points. What seems a good one is that "a financial system populated by smaller institutions (a strike against 'too big to fail') with diverse business models (everyone has their own game plan) monitored by other market participants with skin in the game (privateering foxes in the henhouse) is robust. That it would be robust is without question, but would it be fair and honest? (Note the lack of a transparent character.) They further contend that "an oligopoly of conglomerates ineffectually regulated by a public agency that lacks either technical competence or political authority is not (robust). This is a fair argument against regulation. While there are good arguments for regulation the only one its proponents seem to be promoting is that this time will be different. But all it seems to offer so far is that a "... system that failed to apprehend Bernard Madoff will be beefed up to second-guess the risk management strategies of Goldman Sachs." It is true, all the regulatory proponents seem to be offering is the same old system with security measures increased on numerous levels. Most governments think the Basal proposals are too weak and if passed, many expect individual nations would impose even stricter measures within their own borders. One of the biggest changes is to require an 8% capital reserve against risk, up from 2% so it's a four-fold increase. This would be sufficient if we could depend on people to behave. But we know we can't. If anything you can rely on a sizable portion of people forsaking prudent behavior for quick profits. What the reserve means is that a financial institution would be required to have $1 in reserve for every $12.50 it has at risk in investments. Put another way, that means that a bank can risk 1,250% more than it actually has. In simpler terms, if the bank has capital reserves of $10bn, it can risk investments of $1.25tn. All this if my math is correct, but you get the idea in any case. It seems like too liberal a range of leveraging is being allowed, which is why many countries want to impose their own more stringent capital requirements. This seems a very bad idea in that it would create a entirely new realm of arbitrage populated by traders betting on the spread created by two country's differing regulations. Of course this presumes that investors and traders would also be trying to influence regulatory agencies of different nations in directions so as to create a differential sufficient to profits. Arbitrage is a means by which a profit can be extracted from the difference between a bid and ask price in one asset or a difference in costs and fees imposed by two differing regulatory agencies on the same asset. Perhaps it might be better to regulate or eliminate the arbitrage pit because it's ripe for manipulation, corruption and greed. The marketplace is really no different than Las Vegas but ironically there is less corruption and criminal behavior in Nevada than there is on Wall Street. I'd say go figure but the Nevada Gaming Commission regulate this form of gambling much tighter than the marketplace does its gambles. NGC will pull a license, inflict heavy fines and/or require certain players go elsewhere at the slightest hint of corruption. The players you see -- Wynn and others -- know the profits righteous casinos reap are not worth losing that privilege over some illegal or immoral profits. On Wall Street you're a banker or investment broker sitting in your office deciding where to invest a few billion of the firms excess assets. You know that your bonus this year is going to depend on how much profit the firm makes on your decisions. So, with all good moral intent, you still tend to invest in short-term high-risk vehicles rather than longer term more stable but lower return vehicles. How is this regulated? How does one judge whether this man's decision is prudent? The FT article also says that "Regulators can observe compliance with prescribed procedures ... but have very limited ability or opportunity to assess whether behavior is prudent." This seems a valid insight and begs the question of who does have the ability to judge behavior's prudence. It would appear to be more of a moral issue than a pragmatic one. Underlying the question of a player's prudent behavior is the fact that until we can learn to control our own very larcenous natures, there will always be breakdowns. So we are left at the bottom of it all with our thumbs in our mouths looking about for some guidance on how to make a majority of people behave well. Prudence, however, is judged thousands of times a day across a multitude of courtrooms. Reasonable and prudent behavior is the standard we are each held to in the U.S. and in most developed nations. Behavior is judged as to it's reasonability and prudence every day by juries and judges but a precise definition of reasonable and prudent seems impossible except in terms which are just as vague as reasonable and prudent. Each of us has our own idea as to what that is and they all likely differ. Small baby steps? A urinal maker in Europe tried embedding a lifelike image of a fly in the porcelain and aim became better in a significant number of circumstances. An office manager put a small but noticeable photo of a pair of eyes above a donation box by the office coffee machine and donations tripled. Is there some way to instill a sense of responsibility to reasonable and prudent behavior the same way we seem to be able to instill a sense of patriotism and duty toward fighting a war? How do we do this seemingly impossible task?
