Who would not use an edge if they had one? Every athlete works hard to create an edge so they can defeat their opponent. But, should an industry like the financial service industry, create or maintain an edge to the detriment of the rest of the population?
Yesterday, I cited an article in VANITY FAIR that I thought gave the reader an inside look at a man that worked his life in the financial service industry and rose to the top of his corporation as its CEO. Then reluctantly made the switch to become the Treasury Secretary of the United States at the end of George W. Bush's presidency. I think Hank Paulson was trying to put out the fire, but the fire was out of control. The financial system is to a large measure based on trust. I spoke of this trust yesterday, and I want to repeat that trust is the most important element in the financial industry. When trust is broken, it is like the chain on a bike breaking and there is no connection between the pedal and the back wheel.
Congress, unfortunately, is not up to the task of regulating the financial service industry. If they knew which end was up, they would not need to take money from the lobbyists from the financial service industry. They would now understand how close we all are to the edge of the cliff. Once the trust is gone, it will take years to repair the damage. The slow start back from the present recession is no more than a lack of trust within the system as a whole. Everyone is watching to see who will be the next one to get burned in a big way.
One of the first things I learned when I sold municipal bonds was that ratings are based on a state, county, city, authority or school district's ability and willingness to pay their debt in a timely manner. It sound quite simple. Retire the debt as it matures and pay the coupons as they are presented for payment. But, when debt instruments come under question, the system slows to a halt. There is no reason why better regulation would hurt the financial service industry. The movement of credit from lender to borrower is what it is all about. I wish I had the ability to explain this simple point to the Congress of the United States.
Stay tuned.
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3 comments:
The word verification is 'stent'. Just what our Financial heart needs - a stent. Something to squash the plaque that clogs the arteries and stems our financial blood flow. And the 'stent'? Proper rules and regulations. Properly constructed and reliable ratings. Transparency.
Please? Before we have another 'attack'?
Ah! Gentlemen, you are both right! But in my opinion, the crux of the matter is this:
Everything "financial" went south when our ancestors abandoned the barter system!! (Yes, I'm joking, of course!) However, the barter system had a few things going for it:
1) It was TANGIBLE
2) It was difficult to manipulate
3) It did not depend on trust
4) There was no credit, and
5) Cheats were severly punished, generally on the spot. (No second chances to screw up again!)
So, the problem with our financial system is analogous to what Richard Leaky said about human evolution:
"Man is an ape with cerebral hypertrophy." (I.e., too damned smart for our own good.)
Sorry, Folks -- but I have to laugh -- it beats the hell out of crying!
Summer
Trust is important. How many countries "trust" the US at this point. Not many. Most countries now know we have not been trustworthy and much of what we had said was hyperbole. We essentially "blew" our model of what the future should look like.
We are in Iraq and Afganistan trying to tell the people how to run a government....ha...what a joke. Have you looked at crime stats in the US. There are more people in prison or on parole or probation that is greater than the population of 38 combined states.
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