Sunday, January 10, 2010

Fed up

There must be an analogy in childhood experience to describe the 'chutzpah' of the Federal Reserve asking Congress to grant it full supervisory powers over the financial systems and institutions that gave us The Catastrophe. Where else but in childhood fantasy could it seem like a good idea to reward regulatory failure of such magnitude? In fact, maybe the Fed's request will replace the classic definition of chutzpah---i.e., the guy who killed both his parents and then threw himself on the mercy of the court because he was an orphan.

Eerily similar to the Janet Napolitano claim that the homeland security system 'worked'---yes, maybe it DID work according to the narrow definition of her departmental responsibilities. But she, of course, missed the point, and We The People figured that one out right away.

Not so easy for most of us---including me---to fully grasp the financial shenanigans of what went wrong, how it could happen again, etc.

The Fed, it seems to me, is Napolitanizing failure, with the same logic, which goes something like this: because We the Fed saved the system from total collapse once we figured out what was going on, we should be trusted with preventing similar collapses in the future.

OK, even if they do have the smartest gals and guys in the room, can we really afford to buy this argument? The best and the brightest have given us more than one catastrophe during the post WWII period. We now have banks that are too big to fail---and who let it get this way? Bernancke, Geithner, et al, who were in or adjacent to the driver's seat as this all began to unfold.

Let's remind ourselves that the smartest ones are probably NOT in government---there are not enough financial and other incentives to keep them there. They flow into private sector financial jobs, where their smarts and hard work are richly richly rewarded (wait until this week's news breaks...). So, it's a game of cat and mouse or hide and seek..... the incentive is to invent complex new financial instruments and markets that outpace legislators' and regulators' capabilities to understand or control. Until, one day again, it will be too late.

Yes, we do need new regulations and perhaps new regulatory structures, including the Fed in this process.

In the meantime, here's a new and simple test that might help:

Follow the money. Whenever big money is being made quickly as reflected in profits, bonuses, topline or EBITDA growth versus historical or industry averages, that should trigger an immediate yellow flag.

Am I against big money and big profits? No. BobOnARoll loves success stories, even if there is no money involved. Yet, when entire industries or employees in those businesses start earning exponentially growing sums, let's ask our regulatory bodies to take a good look and explain to Congress and the public that, yes, this time it's just the way the cookie crumbles. And not the crumbling of the entire earth beneath our feet.

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