Desire and Greed: Contemplating the Need for Increased Regulation of the Financial Markets

If desire is the emotional exponent of a human being's drive to have, then greed is the drive to have more and better. As such, it is both natural and, arguably, productive in the context of ambition or even as a component thereof. The desire to eat led early man to hunt small animals and eat whatever grew wild. The desire to eat more and better food led to spears and agriculture. The desire to illuminate dark quarters led to candles; the desire to illuminate better led to light bulbs. But, as is true for all human characteristics and emotions, the lines between a lot, too much, and excessive grow blurry as we achieve a modicum of success at each level. Light and light bulbs are great; large concentrations of unnecessary giant video screens and illumination are light pollution. Agriculture is good; a sense of entitlement to have grapes and peaches year round leads to large carbon footprints for produce. Greed is not sui generis an evil inclination; it merely carries within itself the intrinsic need for external controls where internal regulation (e.g. self control) fails.

You can see where this is leading. Credit is good and drives healthy economic growth. Excessively loose credit leads to huge losses by both lenders and borrowers. But the greed per se of both borrowers and lenders initially drove a desirable expansion of the credit markets and admirable economic growth that sustained the longest expansive business cycle in history. Greed in some form is a component of most every advancement, both technologically and socially, ever attained by the human race. The inability to set boundaries, however, at some point has its own law of diminishing returns and finally leads to undesirable outcomes. It has traditionally been the role of government to set and enforce boundaries our natural inclinations might otherwise ignore - hence, regulation of the marketplace. This regulation can be more or less heavy-handed, depending on the prevalent political philosophy. But regulation is a natural systemic societal response to human self awareness: we know that we tend to break through the boundaries between healthy greed and unhealthy excess. It's where can do becomes must have. We are only human, after all. We live in a society where worth is measured by the size of your balance sheet. Regulation is necessary; however the form and substance of regulation needs to reflect market reality going forward, rather than being a legislated response to the crises of the past.

Everybody has one!

The book at the bottom of the pile on your nightstand. The one you really ought to read because the NYT Book Review told you to. But you have an inexplicable inability to pick this book up and crack it open. Perhaps you are intimidated by the intellectual superiority of the writer or the subject matter is painful to consider. Whatever the reason you initially put off reading this book: the longer you have delayed developing the necessary relationship with the book, the author and the topic, the less likely it has become that you will ever read it. Your antipathy for this amalgam of paper, glue, ink and cardboard has taken on a life of its own. It mocks you from underneath periodicals and the novel you picked up from the discount table at Barnes & Noble. My nemesis is "The World is Flat" by Thomas Friedman. I bought it because I was told to by some trusted book reviewer. I banished it to the bottom of the pile because I hate Friedman. So far, hate has triumphed over intellectual curiousity. And the law of diminishing likelihood tells me that the longer I wait, the less likely it is to happen. That book is going unread. I know it, you know it. And if Friedman ever reads this, he knows it. Time for the bookshelf in the basement and for a new book to take its place. Favored to take the slot at the bottom of the pile: The Black Swan. I never liked statistics, anyway...

Nobody knows the trouble I've seen...

My wife thinks I am a very angry man. Considering that this opinion of hers makes me angry, she is probably right. But I have decided to share with you one of the - admittedly legion - things that makes me particularly apoplectic these days:

MAIN STREET vs. WALL STREET

This rhetorical device, rammed down our throats by the media and politicians, should be tremendously irksome to all intelligent people, regardless of political preference. Gentle reader, without Main Street there is no Wall Street!!! Without people in Des Moines and Shreveport borrowing money to buy things they cannot afford, there is no steady stream of bank loans which need to be packaged and sold as securities. Without folks in countless suburbs leveraging their incomes to buy and/or build mini-mansions, there would be no flow of high LTV mortgages packaged into mortgage-backed securities. There are plenty of hard-luck people out there who lost jobs or suffered an illness that left them unable to service their loans - credit card debt, mortgages, Fingerhut. These unfortunates are statistically present in every pool of loans a bank makes. Loan losses cannot be avoided because the world is an uncertain place and life sometimes throws us a curve (or a googlie, if anyone in the Commonwealth is reading). But the overheated borrowing I witnessed as a banker performing due diligence on loan pools is a social ill that is driven by all of us and not by those who finance it. People leasing vehicles they have no business driving and buying consumer goods they have no reasonable expectation of owning but for easy credit. But folks: we wanted the easy credit just like we wanted that waffle iron cum sandwich maker cum pants press we saw on QVC and by George, we were going to have it.

We all had dreams these past ten years. Everybody wants what Bill Gates has or Warren Buffett. Failing that, we want what our college classmates have. We live in a society where worth is measured by the size of your balance sheet. This is not a uniquely American trait, but it is certainly at its most evident in this country. The can do mentality that made the United States an economic and military force has given way to a must have mindset that may be its downfall. But whatever you do, look in the mirror for someone to blame. Blaming some guy in a pinstripe suit is like blaming the guy who sells you beer for your hangover.

Remember me fondly

History has been extraordinarily kind to Ronald Reagan. His missteps and straight-out breaches of laws both domestic and international have been pushed behind the veil of fond memory people have of their lives during his presidency. Will the passage of time be as kind to W? Methinks not. People not only vote their pocketbooks, they remember with them, as well. In W, we have a President who built a national bureaucratic infrastructure designed to do one thing, and one thing only: affirm his ideological positions. From Justice to intelligence gathering, his entire government has been deductive: He knows exactly what the answer should be as informed by his personal redemptive religious philosophy. Any information and data that did not properly support the presumptive truth was simply dismissed as obviously false. This evangelical, redemptive thinking has drained this country morally, militarily and financially. He has also mortgaged the future of his party and any hopes good men like McCain may have had to be considered on their own merits. By subjugating the entire party to his philosophy, and the national bureaucracy to the party, W has effectively created a situation in which the electorate is unwilling to assume that any Republican can operate outside of the "my way or the highway" strictures he has imposed for 8 years. Obama does not have to be the best qualified candidate, he has to be a non-Republican who can fog a mirror. Obama's time to truly benefit this country would not under ordinary circumstances have come for another 4-8 years. He is unripe as a politician and as a candidate. At least we can look forward to 4 years of really good speeches.

Guilty Pleasure

"Love, actually". For those who have not seen this British flick - do so immediately! Drop what you are doing (unless you are holding a baby or a senior citizen) and rent it. We first saw this movie when it was released and have watched it periodically since. It is a funny, touching film following a number of characters whose stories are related without being entirely intertwined. You never get emotional enough that you feel you ought to shed some tears, and any maudlin component is more than offset by the comedic content. A great pick-me-up when you are down (and who isn't a little bit down, these days?).

"Homeownership Resurgence"

This is an interesting concept put forward by McCain last night. In short, it diverts some ($300bn) of the 'bailout' money just approved by Congress and makes it available for whole loan purchases. The loans to be purchased would be mortgages to homeowners at high risk of losing their homes. The government, as owner of the mortgages, would then renegotiate the loan so the mortgagor could retain ownership. First it should be said that this idea is not new. In some form, it was mentioned by Barney Frank, as well as a Columbia professor or two. Nonetheless, McCain is the first candidate to make it a part of potential policy for his administration.

I have a few questions about the mechanics of this program. Treasury is obviously set up to purchase loans. But who will negotiate with the borrowers? Who will set credit policy for the program? Who determines the appropriate recipients of this type of aid? And who will service the loans once they have been restructured? Does Treasury sell them back to the private sector once they have been restructured?

My guess is that ultimately, this proposed aid will take the form of a government-funded program administered by the banks currently servicing the mortgages in question. Otherwise Treasury - or whichever agency ends up with the mandate to administer this 'Resurgence" program - would have to undertake the massive effort of recreating the systems and staffing of a mortgage bank.

Rate cut? Bah, humbug!

Meanwhile, the markets are taking advantage of clear central bank willingness to do absolutely anything to lubricate the credit markets and are refusing to budge (upwards) in response to most recent global actions and the US stimulus package. Why should banks loosen credit now, when money is only going to get cheaper if they don't? There is plenty of liquidity available to the banking system. Banks have been reluctant to pass along low rates to consumers since last year and have simply been beefing up operating margins to cushion against credit losses.

If central banks and governments are interested in improving the availability and cost of credit to business and individual consumers, they need to take a regualtory step along with rate cuts and increased liquidity measures. All Fed, ECB and SNB et al actions would be far more effective if coupled with mandated cuts in the cost of credit to small businesses and credit-worthy consumers. For a limited time, the maximum spread between funding costs and lending APR could be fixed for a variety of key credit products, such as small business loans for capital projects and credit consolidation for consumers.

I do solemnly swear...

You would think that after 25 years or so in public office, McCain would be a more polished public speaker. The "my friends" rhetorical device is getting old and is starting to grate on my nerves, as much as I respect the Senator from Arizona. On the other hand, and as noted by, amongst others, Vodkapundit (http://pajamasmedia.com/blog/drunkblogging-tonights-mccain-obama-bout/) and a few people interviewed on NPR, Obama stuck with what has worked for him and did not bother answering most questions. This so annoyed my 16 year-old daughter that she yelled "answer the question! sheesh!" at the television and went upstairs in frustration. I admired her political engagement until I realized she probably was looking for an out from Mom/Dad time to go back on AIM and her mobile. Anyway, back to politics. As far as I am concerned, I am convinced that even so-called "undecided" voters have, in fact, made up their minds weeks ago concerning their vote. They simply enjoy being identified as the "undecided swing vote" and lurk around TV cameras and NPR reporters hoping to be interviewed. What else is there to do in Sheboygan?

McCain is a poor rhetorician who often strays from his script, as evidenced by his stumbling over words on occasion when answering direct questions. Obama is a soothing speaker who seldom abandons his non-message lines, repeating "Bush/McCain" and depicting McCain as a cheerleader for W. until my mental image of the government has been reduced to visions of McCain in a tutu alone with the President in D.C. Apparently these were the only two people in Washington running the country the past eight years. No Democrats in control of Congress since the last election cycle, I suppose. Amazing what you cannot do with a majority in a democracy, these days.

File under: Politics nauseate me.

random thought

Some people diminish with age until all that is left is quirky habits and a vaguely distressing odor and a poor choice of wardrobe. Others are left with their strengths: wisdom, empathy and kindness - and really nice skin. I don't know if you get to choose which way you develop. ANy thoughts?