A Cleaner Game

I do not think any sane person would suggest that we do not need air traffic controllers for commercial air travel. No one would argue that we should just let airlines fly around where ever, and land and take off where ever and when ever they want. How long does anyone think such a condition could exist before there would be disaster?

Financial markets need controls as well. Unfortunately, the last man to head the Fed did not believe in regulation because he was a disciple of a woman that wrote books and believed in a philosophy of laissez-faire capitalism. But, the head of the Fed was not the only one in Washington that championed this philosophy for business. Oh, it sounds real smart when you say it, but in practice it is a disaster.

Much of what we are experiencing in the financial markets today is the result of letting some very large markets fly around with little or no controls. Abuse is to financial markets, what dung is to livestock, a by-product. Unless people are hired to police the situation and make sure abuses are not being perpetrated on the soon to be victims, the field will become unsightly and start to cease functioning.

Words like melt down do not really describe what is taking place with financial markets. Markets are made up of people. Traders are the first piece of the equation. Their confidence in what they see, hear and feel is what determines what that firm is willing to pay for a security, like a bond. When traders back away from bidding for bonds you have a problem. Securities are not suppose to be unmarketable. Prices normally fluctuate up and down, but when no one is making a market for a piece of paper, you have a crisis. When no one wants to bid on a whole class of assets because they do not know what is in them, you have a melt down.

All of this financial mess and bailout could have been averted. People in Washington and New York must start thinking and step away from the stupid ideologies that they cling to. The simple truth is, we do not have enough financial “air controllers” on the ground and they do not have the authority to police the markets and the rating agencies the way the job needs to be done. And, the few that are on the ground do not have the numbers of shoes on the ground to do the job right. Couple that with the lobbying for less regulation and you have the present situation of our financial markets. And no, the Fed is not Superman. The Fed can not fix confidence overnight. The problem is not high interest rates. They have fixed that. We used to say, you can not push on a string when I was a portfolio manager of fixed income funds.

Much if not all of the present situation could have been avoided had the proper amount of regulation been put in place and the proper number of people hired to enforce the regulations. Now that the system has been badly abused, the responsibility to clean the mess up will fall on every taxpayer. So much for books with too simple an ideology on how a free society should function. A nation with as much debt as we have better start running a cleaner game, investors do not have to play in our markets. I know Chairman Ben Bernanke will be polite enough, but will he be bold enough to tell the Congress what they need to hear? Stay tuned.