Dylan Ratigan, a CNBC personality who has easily been one of the best financial reporters since the crisis began, is fond of saying “greed and excess” meaning blame for our current situation rest with greed on Wall Street and excess on Main Street. I agree with that but would also add a third entity to that triumvirate…Government.Like Crassus, Pompeii and Caesar these three are responsible for the health, direction, security and financial well being of a country with each playing a primary role, Wall Street the financier, Main Street the doer and Government the leader. Everyone’s important but some are more important than others, to borrow from Orwell. I think Ratigan, in his peerless objectivity misses this point. While everyone had a hand in this mess, it wasn’t an equal hand. Think of it like 3 criminals robbing a bank. You’ve got the stickup guy (dude with the gun), the code breaker, and the driver. The guy pistol whipping customers and shooting security guards is a lot more culpable than the getaway dude or the nerd brought in to crack the vault safe. As such, we begin this Greed, Excess and Government series with an examination of the latter…the most culpable.
60 Minutes just ran a piece on the current financial crisis detailing Credit Default Swaps (CDS) and the role they played in creating this global mess. As a reminder a CDS is just an insurance policy for a mortgage. In essence people who buy and sell CDS’s are simply gambling on whether or not you will pay your mortgage. 60 Minutes analogized this perfectly to legalized gambling, which is exactly what it is. The piece also mentioned that 100 years ago our government, in all its wisdom, deemed this type of derivative investment was too risky to the stability of the financial system as a whole and outlawed them. I’ll say that again, back in 1907 politicians recognized this was a problem and MADE IT ILLEGAL. Fast forward to 2000…our senators, President and congress decided that these types of derivatives no longer posed any threat to our financial system and legalized them with no regulation. So the beast that was originally put down because it was found too intractable for the traveling circus, was not only woke up but also allowed to roam uncaged and unguarded…that makes sense.
What did this legalization mean in non sardonic terms? That the financiers, who some could argue were just doing their job, could now leverage the system and push the financial envelope because the leaders gave them permission. What our leaders failed to realize in this construct is that while the financiers play an important role, by and large they operate by one tenet which is the Smithian theory of the invisible hand. This theory posits that a person (or entity in this case) should simply do what is in their best interest, because your best interest ultimately serves to better society at large. So as an example, if a broker were to find that he could legally make $10B on deal that would bankrupt several small regional banks and destabilize a local economy he would still make the deal because it’s in HIS best interest to get the money, local economies be darned. Now I’m not ready to cast off Smith, I like his work, he was obviously prescient in his analyses and I’m a capitalist. But our Leaders are not in a position to be smitten with ideology or 18th century treatise’s. They, like all good leaders, should be committed to practicality, critical thinking, unemotionalism, forethought and above all committed to the ultimate protection of the most vulnerable participants in this structure…Main Street. In this structure when Govt and Wall Street start playing footsie instead of keeping each other on their toes then it’s no longer a structure it’s collusion to the detriment of the doer’s.
