Missives from the 6th Floor

For the past few days, those analysts on either side of the political spectrum who could hold their desire to place blame for the situation on "the other guys" have been saying largely the same thing; a lack of transparency and an unprecedented degree of leverage left several of the largest and seemingly most stable financial institutions in the US in such a weakened state, that covering their bets has brought them to, and in some cases past, the brink of disaster.

And I'm not even going to get started on the fact that many of the heads of these companies - ostensibly responsible for the bad decision making that's been eating away at their stability and liquidity for months, or even years - are getting golden parachutes as their corporate aircraft careen into the ground.

This raises interesting internal questions in me. When asked, I tend to portray myself as largely a fiscal conservative - tending toward less governmental involvement, lower government spending, and lower taxation. I like local and distributed (as opposed to remote and centralized) decision making, and I believe that smart, involved, caring people make better decisions than elected representatives.

And I don't believe that most of our elected representatives are smart, or caring.

At the same time, I believe the US to be barbaric for not having a national health care system, and for being unable to shore up Social Security to care for it's work force as it ages. I support the space program, and public education, and the library system, and I recognize that not all of these things can be solved, or funded, at a local level.

So when pushed into a corner, I have to admit that most people aren't informed, involved, or in some cases educated enough to look out for themselves - and that at the end of the day saying that "the smart will prevail" is really no different than saying "might makes right" - smart is just a less physical form of might.

So in the end, I think regulation and oversight are necessary evils,. born of man's desire to pull himself up by someone else's bootstraps to get ahead.

Which brings me back to leverage.

The libertarian in me wants to say that this whole crisis is just a correction - the market "sorting things out."

Those who are smart, or lucky, or expected the unexpected and hedged, will get rich.

And really, this one's hasn't been that unexpected. the real estate bubble was so over-inflated even some of it's practitioners - a group seemingly composed of the most painfully financially optimistic and deluded people - were starting to sense the end coming.

So, if you were one of those CEOs that wrote themselves multi-million dollar parachutes into their contracts, bully for you. And if you were foolish enough to invest in one of these firms, tough luck.

And if you were foolish enough to invest in any of a number of mutual funds that were foolish enough to invest in these firms, tough luck.

And if you were foolish enough to deposit money in a bank which was foolish enough to invest in these firms, or leverage themselves with risky debt, tough luck.

...

Only I'm not sure there was a reasonable way individual investors could know how risky some of these markets were, so most of us are getting screwed because we weren't covering, or perhaps we couldn't possibly cover, our backs.

So I'm forced to consider, just for a moment, that maybe more regulation, and smart people in positions of authority and responsibility, could have - should have - seen this crisis coming, and taken action before it became so acute that you and I, as American taxpayers, are going to foot the bill for the bad decision making made in the private sector.

Corporations (and financial conservatives) are constantly crying to be allowed to keep more of their profits, to act with less oversight and interference from government, and then they force the taxpayer to clean up after them.

I don't know what caused the current crisis - theories of causality are easy to fabricate and impossible to prove. We've not yet figured out how to observe the system without impacting it, so over 400 years after Laissez-faire was coined as economic policy, we're still debating it's pros and cons. Decades after the last financial crisis of this magnitude in the US, there's still no consensus on weather government intervention caused it, or was too little too late to stop the avalanche.

One thing seems clear, however - if someone knowingly leverages themselves - that is makes a bet with borrowed money - one must be ready to deal with the consequences of their bet going bad, no matter how "sure a thing" it might seem.

Be those consequences physical violence or financial ruin - anyone directly entering into such an agreement is responsible for understanding - and accepting - the potential outcome. And they have no right to expect a bail-out when their marker comes due.

The responsibility of parties incidental to the transaction are tricky. It does seem that we - as a society - need to work to minimize collateral damage, and learn from our mistakes - but we're slow to learn, and we rarely make exactly the same mistake twice, so our past experience is often of limited utility as a predictor of even near term misadventure.

Never mind the fact that those who stand to gain the most from risky ventures are nearly never above using misdirection, or misinformation, to achieve their aims, and for a layperson, one burning bush looks a lot like another.

So where does this leave us?

Damned if I know.