April 29, 2010
Whistling Past the Regulatory Problem
Senator Carl Levin (D, MI) strode right past the fundamental problem while lambasting Goldman Sachs executives (emphasis added):
Wall Street is on the wrong side of this fight. It insists that reining in that -- those excesses would unduly restrict the free market that is the engine of American progress.But this -- this market of ours isn't free of self-dealing or conflict of interest. It isn't free of gambling debts that taxpayers end up paying.
It isn't free of those debts because — primarily by backing risky mortgages through Fannie Mae and Freddie Mac and increasing barriers to competition with regulatory bars to clear — the government has allowed too-big-to-fail bailouts to become an implicit part of the economy. Layering on regulations will only increase complexity and the potential for the manipulation of the financial industry, whether for financial or political purposes.
The question I have for Senator Levin, from his line of questioning is let's say I own 1,000 shares of MSFT stock. My opinion changes that I now think MSFT will be a crappy company and will lose money. So I sell my shares to my buddy Bob. However, I feel so strongly that MSFT is crap, that I will also then short the stock by another 1,000 shares. Should I be required to tell Bob of my plans? That I believe I am selling him a load of crap stock? And what if MSFT *does* then go bankrupt and Bob is left holding just paper and I become rich? Should I be investigated?
It's the same thing as what GS did. They didn't make the housing market tank, they just understood it better than most and thought that their risk was too high and decided to not only sell it off (who wants to hold the equivalent of stocks that are going to go down?) but they also shorted it. I don't see a problem there. I wish someone could tell me what Goldman did wrong. They simply worked the market exactly like it is supposed to be played. It's a zero sum game. They were right, other people were wrong. If GS actually *caused* the housing market to tank, then sure, that's criminal and that's securities fraud. But I've seen no evidence that they did that.
Posted by: Patrick at April 29, 2010 2:37 PMAs with Patrick, I believe we are thinking about regulating human nature. Sort of a "political correctness" of philosophy.
Although I believe the "Tulip Mania" is the first recorded "bubble", I am sure there were nmany efore. And that there have been very many since. It is simply the "business cycle" writ large.
Ever wonder why Germany was able to re-arm and build a huge army while we were in the throws of the "Great Depression"? Some say it was our regulation. Now, I am sure that some will argue that all of that military spending was "stimulus".
Posted by: Warrington Faust at April 29, 2010 3:32 PM