Can the party please be over?December 8, 2008: 1:49 PM ET
Today FORTUNE senior editor at large Geoff Colvin looks at four potential repositories for blame in our ongoing saga of doom. They're a credible group of whipping boys, from Alan Greenspan to Bill Clinton to the collapse of regulation that was supposed to protect us.
While opting for a subtle, nuanced melange of factors, Colvin believes that, in the end, blame will center on the failure of government to keep an eye on those were supposed to do it for themselves - our financial institutions and their ostensibly capable viziers, wizards and mendicants.
Colvin thinks this is unfortunate: "If this version wins out," he says, "watch for heavy new regulation of risk markets and financial institutions - leading to reduced innovation, profitability, and market values in the sector."
While I have nothing but respect and affection for Mr. Colvin, who has probably forgotten more than I ever knew about economics, I do have to say I'm disappointed with this analysis. In fact, it qualifies, I think, as the first salvo of note in what will most certainly be the battle to maintain Big Finance's right to screw with everybody else's money as soon as things get back on their feet again.
File it under "Sowing the seeds for our own destruction, Part VI, A New Beginning," scheduled to open at a financial theater near you in the Spring of 2012. It forms the basis of a rationale for getting the party started again just as soon as we're able, in the name of creativity and, of course, profitability.
Here's what I think: Every piece of the machine does its job, performing its function as one would expect. That's something we can count on. So:
- Big financial institutions operate in such a way as to garner the greatest amount of short-term profit for their managers, first and foremost, and then for those they purportedly represent;
- Individual investors want to make the greatest amount of money possible;
- Everybody will behave in such a way to pursue their own self-interest where money is concerned; a "free market" is therefore designed to nurture and encourage a free expression of institutional and personal greed, which is neither right nor wrong, just what is;
- The level of risk people are willing to accept for others is a lot higher than what they will tolerate for themselves - in other words, if they get a fiduciary hangnail it's tragedy, if other people fall down the stairs and break their financial necks, it's a free market;
- Government, in all its many forms, exists to represent the needs of the larger society over and above the needs of any one sector of that society; and to stand in for those who do not normally have the power to pursue their own interests in this supposedly free market, which is not really free, because...
- A free market is not free but in fact favors the strong and wealthy;
- It is therefore Government's job to manage the larger picture so that any one group does not run amok and pursue its own interest to the detriment of the larger society in which we all live.
When any major segment of the structure fails to do its job, then, things simply don't work as well and, after a while, don't work at all. In our case, in my humble opinion, the biggest, fattest and greediest of the moving parts of the machine was allowed to spin too hard and too fast for far too long. Now it's flipped off its trestle. We the people need to get it back into the right groove, and then retool the mechanism so that it won't happen again for another 100 years or so.
For a much more articulate and credible take on this matter, I refer you to what Nobel Prize laureate Paul Krugman has to say in the current New York Review of Books. It's not a long article; even somebody with my attention span was able to get through it without looking at my BlackBerry even once.
"What we're going to have to do, clearly, is relearn the lessons our grandfathers were taught by the Great Depression," Krugman writes, continuing:
"I won't try to lay out the details of a new regulatory regime, but the basic principle should be clear: anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn't a crisis so that it doesn't take excessive risks. Since the 1930s, commercial banks have been required to have adequate capital, hold reserves of liquid assets that can be quickly converted into cash, and limit the types of investments they make, all in return for federal guarantees when things go wrong. Now that we've seen a wide range of non-bank institutions create what amounts to a banking crisis, comparable regulation has to be extended to a much larger part of the system."
I know a lot of you are going to start weeping and gnashing of teeth about this stuff, but hey, look at it this way: even really big capitalists are occasionally amenable to a little friendly socialism now and then when, you know, it's absolutely positively necessary to protect EBITDA.