The Right Tools For The Job

Today I would like to address two issues. The first is the so-called bailout of Bear Stearns, the fifth largest investment banking house on Wall Street. One comment that I received was that my defense of the actions taken by the Fed were that of a “true banker.” Naturally, that is one man’s opinion. I think the fallout from not taking the actions taken by the Fed would have been several times more costly to the system and the whole economy. It was not just about saving Bear Stearns from going down, it was about saving all the firms that did trades with Bear Stearns and cleared through Bear Stearns that would have presented our domestic economy and the world economies with an unnecessary calamity of such great proportions. In my humble opinion, the price to be paid for teaching such a lesson clearly was not worth the price to be paid by so many.

In the Sunday New York Times, Robert J. Shiller, professor of economics and finance at Yale, wrote a piece titled “The Fed Gets a New Job Description.” In the article, Shiller says that the recent actions by the Fed to stabilize the financial services industry is the right direction for the Fed to be taking and evolving into new responsibilities. There is a quote printed in bold type that reads “The long road from banker’s bank to market stabilizer.” This I do not agree with, nor do I think this is the direction the Fed should taking, so, let me explain.

Let us say you have several large swimming pools, and at these swimming pools we have life guards and water filtration workers. One day when the life guards are on break, a swimmer gets into trouble and needs to be rescued. So, the water filtration worker jumps in and saves the swimmer. Question: Because the water filtration worker saved the swimmer, do we add life saving to the water filtration worker’s job description? I don’t think so!

The Fed is our central bank. It is not the Securities & Exchange Commission or any other of the regulatory agencies in Washington whose job it is to prevent a melt down of the system. The Fed fills the vacuum because Congress does not have the balls to write the regs necessary for the financial services industry in the 21st century. That is a poor way to run a railroad. When Senator Bunning asked if our financial system is so frail that one investment bank could do so much damage to the whole system, I could not believe my ears. The Congress chipped away at the Glass-Steagall Act over the years and now they wonder what happened to their safety net? (The Glass-Steagall Act was replaced by the Gramm-Leach-Bliley Act of 1999, which effectively repealed the former.) If we use this line of logic, would it not follow that the FBI be responsible for all traffic lights in every city?

Congress needs to step up to the plate and put together legislation that will improve upon that which was and will effectively work for the good of us all in the years to come as it relates to the financial services industry. For the Fed to just expand their responsibilities to market stabilizer, in my opinion, does not strengthen the system. Do we want to drive around with our airbags already deployed? Let the central bank get back to being a central bank with some modifications, but let us make the Congress do the heavy lifting of writing the regs for the new century. I hope Bernanke and the other members of the Fed will explain to the Congress the need for better regs and the proper number of shoes on the ground to do the job right.

When I was a kid, my dad had a work shop and in the shop there were several power tools. I remember asking my dad about a tool I saw advertised on TV that did several types of wood working jobs, an all-in-one wood working tool. As a hardware store man and someone who knew how to use good power tools, my dad did not think much of a tool that did many functions. A fine lathe, drill press or table saw that was made to perform its function and do it with a high degree of accuracy, is what the craftsman wants and demands to produce truly great work. Perhaps it is time for Congress to realize that regulations and oversight demand the right tools to do the job right. The all-in-one tool may get the job done for the weekend hobbyist, but it can hardly stand up to the requirements for commercial production. Our place in the financial services industry in the global economy demands that we put together a regulatory body that can meet the challenges of the 21st century.

Friday, the jobs lost numbers came out. Add to that figure for the three months of 2008, the jobs lost in the fourth quarter of 2007, and we are looking at over a half million jobs lost in the economy. There is a price to be paid for this too. That price is going to be in dollars and lives lost. Where are these people going to go and what are they going to do? For the government to sit on their hands is not the smart way to go. If anything, projects to rebuild and repair our infrastructure should be put into action now. There is a disaster out there waiting to happen if we do not act and act now, we all will pay a much heavier price than unemployment insurance. Stay tuned.