davelj, I read that excellent article. The lesson that many draw from this extreme example of a financial melt-down is that more regulation is better.
When I look at what has happened both here and in Iceland, I see the fundamental problem as a headlong rush into excessive borrowing and asset price inflation. Yes, regulators, if they really wanted to, had the power to check this. Private investors, if they had acted with prudence, could have prevented it. The central issue in my mind is not the quantity of regulation. The only question is, who do you trust more to take away the punch-bowl when the party starts to get interesting?
I grew up in a country where politicians and their friends had custody of the punch-bowl. It wasn’t pretty.
By contrast, our current system here was originally designed to rely on private investors to pull back when the party got a little too crazy with their money. Unfortunately, over the last 30 years or so, we have moved to a professional money manager system. Now agents of the people who provide the money make the investment decisions. These agents get compensated very well when asset prices go up, and simply get a new job somewhere else when prices go down. They therefore push for higher asset prices, regardless of risk. Their interests are not aligned with the people providing the money.
Unfortunately, rising asset prices and lots of cheap loans make almost every voter happy, so the populace love it (without realizing it is unsustainable). With professional money managers making millions giving them money on the one hand, and voters anxious to get free lunches from appreciating home and stock prices on the other, politicians cave in and push for ever more cheap borrowing and inflated asset prices.
So are we now seeing our politicians finally making the really necessary and hard choices – undoing all this cheap borrowing and inflated asset prices? Haha! Check what the Congress and the White House, nearly to a person, are pushing for now – cheaper money and higher asset prices. With our entire political class united to push in the wrong direction, we are not yet even at the beginning of the real recovery.
