Wednesday, April 1, 2009

History Repeating

They say those who cannot remember the past are doomed to repeat it. As we move forward from this current “economic crisis”, what should be done going forward to prevent history from repeating? I keep hearing the power brokers like Barney Frank and Timmy Geithner proclaiming the need for tighter regulation, and an increase in the interventionist powers of the Federal Treasury Department. Or as Barney said 50 times on a recent Economist Podcast “Systemic Risk Regulator”, where ostensibly the Government intervenes in the financial system with broad based, absolute powers anytime they believe there is a flaw in the system that could lead to a possible collapse. The irony being that Barney Frank had executive oversight over Fannie Mae and Freddie Mac, and announced that there was nothing wrong with them months before they collapsed from over $30 per share to less than a dollar. Frank had oversight, said there was nothing wrong, and evidently something was very wrong. The collapse of Fannie and Freddie drove the collapse of financial markets around the world last September. Thank God we had federal oversight… (sarcasm intended)

I don’t support more regulation, and I don’t support less regulation. I support the proper regulation. As I see it, there are three crucial regulations that need to be in place and enforced.

1) Banks should not loan money to people who will not be able to pay it back, and if they do it should be small sums. If a family makes 30 thousand dollars a year, has no assets, they should not be provided with a no money down mortgage to buy a $250,000 house. If an individual has a visa maxed out at $3000 and they can barely afford the minimum payments, they should not be issued a brand new MasterCard.

2) Financial institutions should be forced to hold a certain proportion of cash to back up equity positions and loans. They should not be allowed to issue billions in dollars in loans, or purchase excessive amounts of high risk equity if they do not have the cash on hand to back it up. This was what caused the stock market crash in 1929. Too many people and banks taking out loans to buy stocks, inflating the stock market with money that technically did not exist. When everyone realized it, they rushed to the banks to withdraw their money and there was no money left to withdraw.

3) There needs to be more transparency at financial institutions, as there is supposed to be. If a company hides debt, or misleads the public on the nature and structure of its assets, that it illegal. The government should enforce the law, and throw whoever is responsible behind bars.

On the matter of the bonuses to the AIG executives, I say it was a mistake to allow federal money to go into the pockets of the people who ran the company into the ground. Whoever in government allowed that to happen should be fired, Liberal or Conservative. But government suddenly getting into the business of capping executive compensation at large companies is a slippery slope. Tax dollars should not find its way to their pockets, but whatever contracts that were signed should be honoured. I think Alex Rodriguez is overpaid, but that doesn’t mean that I believe he should have to give any of that money back if he fails to hit .300. If these companies want to reward failure, let them do so, because in a competitive market they will eventually go out of business. Nobody should be “too big to fail” and if they are, chop them up into smaller pieces and sell them off like what was done with Microsoft.

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