When you think financial system, what do you think of? Wikipedia says “the financial system is a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions.”
Close your eyes for just a second and imagine the American financial system: the never ending network of overlapping and interlocking relationships and connections. Mind boggling, isn’t it?
Now, conceptualize “financial regulations.” Wikipedia says regulations “are a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or non-government organization.” Regulations then, manage the relationships that make up the financial system in America. That sounds like a BIG, BIG deal, wouldn’t you say, managing all of those relationships? I wonder what kind of super computer they got to process all those transactions and all that information.
Wait, it’s just people? It’s not some super-computer recording transactions and predicting trends? Advocating regulations is advocating that PEOPLE, make the calls that manipulate the American Financial system for the good of the nation as a whole? That doesn’t make sense. It must be a pretty other worldly group of regulators then.
It’s not. It’s guys like Timmy Geithner who forgot to pay major chunks of his taxes because he (allegedly) couldn’t figure out Turbo Tax. He’s the one who is going to lead the charge to interpret all the data from these millions of inputs and keep this boat afloat?
To be fair to Timy, the regulator in chief and primary advocate for financial regulation at this moment is President Barack Obama. Howver, with two wars, an economy continuing to crumble under the increasing weight of his fiscal policy, you’d think he’d have plenty of other things to think about without trying to micro-manage the entire network of financial relationship in the whole country.
John Stossel’s opion piece in defense of a free market response to the financial hole that Obama keeps digging us deeper into is a welcome evaluation of the whole messy situation. Stossel quotes
F.A. Hayek [who] said… “[W]ith essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.” So when regulators set out to redesign an economy, they display not wisdom but a “pretence of knowledge.”
To be fair, President Obama may be the most intellectual President to occupy the Oval Office. Knowledge without wisdom, however, is dangerous like a Narc-anon convention at Neverland Ranch. While President Obama has paraded his bookish intellect to anyone who would listen, he has also, at every conceivable turn, flaunted his glaring lack of wisdom. This gaping lack is never more evident than his brain bending hubris which causes him to imagine that he can actually regulate the financial system, with a team of carefully selected minions, of course. The President says,
“[W]e will … coordinate and share information, to identify gaps in regulation, … solve problems in oversight before they can become crises … that will allow us to protect the economy.” [Stossel’s emphasis ]
Imagine “Turbo Tax” Timmy, Larry Summers, and their choice of financial wizard women and men, sitting in a room out there, protecting the economy. How do you do that? In Obama-land, you arbitrarily tell some people they can only earn so much money. You then create stress tests to tell you which banks need more government money (which we don’t really have anyway) but usually just end up causing stress.
I don’t blame them for not getting it right though, these regulators are just regular, plain ol’ people. People with lots of degrees and plenty of experience to be sure, but they also have a history of making mistakes. Stossel says,
Regulators are human beings with the same shortcomings as everyone else. Even if we assume they have the best motives, on what basis do we believe they could possibly know what they need to know to manage a financial industry that is complex beyond conception – and changing every day in response to new conditions?
That seems like the most straight ahead, intuitive reality in the world: the financial industry is complex beyond comprehension, and changing every day. What to do then? Are we stuck? No. Stossel makes the free market point:
Contrary to the foes of free markets, the choice is not between regulated and unregulated markets. As the French economist Frederic Bastiat long ago pointed out, the free market is regulated by its own logic. If we have simple, easily understood rules against fraud, then people acting in their self-interest, without privileges or bailouts, generate market forces that create order and make our lives better. The key is market discipline, which government reduces whenever it intervenes.
The market isn’t perfect, but either are the current eco-goons. The difference is that the market, if left alone, will correct itself. Inserting heady guessers who imagine they are smarter than the system invariably leads to actions that prolong the problem and keep the market corrections from working.
Those who say that there are companies too big to fail have the burden of proof, and they have failed to make their case. Despite their stimulations, bailouts, and prognostications about upturns and upswings, the economy isn’t recovering. Obama’s intellect has become a hindrance to recovery, because he has supreme confidence in his intellect alone, so he reacts rather than responding based on principles. He believes he and his people can read and fix the market if only they have the right regulators and regulations in place. That’s where he and Bush make the same mistake: adding more government to fix the market problems. I leave you with Stossel’s conclusion:
Obama says the free market is “not a free license to ignore the consequences of our actions.” He’s right but doesn’t understand why. A genuine free market allows risk takers to fail and suffer “the consequences.” Only government can grant “license” to ignore consequences. Government caused the financial morass by doing just that – pushing banks to weaken mortgage lending standards, pressuring Freddie and Fannie to buy up dodgy mortgages and sell them as safe securities, bailing out big banks when they got into trouble and insuring bank deposits – thereby encouraging us not to care if banks are reckless. Government failed, not the market. Obama’s answer? Just like George W. Bush’s: more government. Give me a break.
Case-in-point update: Joe Biden today said that they misread how bad the economy was. Again, of course you did, that’s not your fault. The economy is a difficult thing to read, even if you’re The One. It would just be nice if they would give up on the idea that they’ve got all the answers, quit tinkering and let it work itself out.