If At Least This Debacle Were Teaching Us a Valuable Lesson...CONT'D

Henry Kaufman Says Hard-to-Measure Economic Behavior Has Caused Wide Swings in Interest Rates - WSJ.com: "Amid the daily news about economic woes, it is useful to ponder the long view. And the long view shows that we now stand at the tail end of the greatest secular swing in interest rates in U.S. history. Interest rates are a barometer of economic conditions. So where have they been, and what can they tell us?"

This opinion piece starts out very promising. Some interesting economic history and a VERY scary graph (QUIZ: where do you think treasury bill rates are headed next?). But right on the heels of laying out some good history, Mr Kaufman's recommendations gravitate to government regulation while ignoring the obvious.

While I am sure there is potential benefit in selective tightening of rules around securitization and balance sheet accounting, we all know that for every regulation there will an innovation that side-steps it.

In the early years of Mr Kaufman's history, were things so much better because things were so much more regulated by the government? I think not. Did our parents and grandparents have to wade through 1/10th the volume of financial disclosures (Past Performance Is Not an Indication of Future Results, Offer Void Where Prohibited, Batteries Not Included) that we do now? How many SEC lawyers per capita were employed in the postwar period vs today? How many trial lawyers were crusading "on behalf of" our parents to protect them from securities fraud perpetrated by "greedy corporate executives?" I'll concede financial markets were simpler back then, but the increasing size and complexity of the markets doesn't argue for more reliance on regulation but less. The bigger and more complex the market is, the more we need to rely upon inherent, self-regulating mechanisms.


Here's what I think the differences were, and it is these differences which should guide our way forward:
1) Moral relativism wasn't nearly so pervasive. Moral and ethical constraints silently "regulated" countless decisions
2) Negative consequences awaited those who screwed up. Lack of consequences is at the root of this current economic downturn. The whole securitized mortgage free-for-all occurred against the backdrop of the implicit guarantee of the US government standing behind Fannie and Freddie securities. Then there was the runaway government spending - the consequences of which were obfuscated in the short-run by massive expansions in the money supply by the Fed.
3) People were less greedy - JUST KIDDING. You hear politicians (like John McCain during the election) implying the problem was greed. Excuse me, was greed just invented in the last decade? Greed was always there, just better held in check by 1) and 2), above.

Unfortunately, it is in the self interest of the big government crowd to chalk our problems up to insufficient regulation. That way they can amass more power in Washington. Unfortunately, they are driving us away from a culture of shared values and responsibility, and toward legalism and statism.