Economics in the 21st Century

It seems as if the Braves can't take advantage of Phillys losses. I am irritated. Thank God football is coming. I am getting a bit tired of the continuing baseball season.

Meanwhile, there was an interesting program on Frontline tonight and I took the opportunity to sit there and watch and discuss the propriety of regulation in the financial market, which was set out for all to see as they showed the deregulation of derivatives on the over the counter market in the 90's and 00's.

The show depicted the rise of Alan Greenspan, a disciple,and perhaps, lover, of Ayn Rand, who was hired on to the Fed by President Reagan and continued in his position through the Clinton years and on into the beginning of the George W. Bush years. The position of the program was that even in the face of rampant fraud in the derivatives market in the 90's which caused an economic downturn when the Russian markets began to waiver after the fall of communism, the Fed and Treasury folks remained as true believers who didn't want the deputy sheriffs in the federal government to prosecute fraud on the idea that the market would correct any problems, even fraud.

The problem was that the Greenspan guys didn't even see that their actions to protect the hedge markets when they were teetering was exactly what they said shouldn't be done. In the end, they were able to put off the fall of the economy artificially until the end of the Bush decade, which basically left the new administration the task of fixing the problems.

Unfortunately, the real solution would have been to continue to police the financial market so the Bernie Madoffs wouldn't be able to run rampant over the lives and dreams of people who had no way to protect themselves other than dis-believing their financial advisors. Now the problem is that anyone who yells for regulation is perceived to be a socialist, when, in fact, the reality is that the regulators are more interested in law and order and protecting the market from fraud than controlling the market.

The ultimate irony is that Greenspan and his compatriots were doing more to effect the market by tweaking the interest rates and by demanding that the banks hold up the hedge funds to protect the markets than they would be in simply policing the market for fraud.

You see, regulation is not bad per se. Regulation is only bad when it prevents the ethical actors to continue to act. It is good when it prevents bad actors from taking advantage of those who cannot protect themselves. A lot of bad loans were made over the last decade in order to earn greater fees on the loan transactions. The churning of the mortgage market allowed some people to make money on good loans, but it also allowed a lot of people to make bad loans which ultimately led to foreclosures, bank failures and economic chaos.

If there had been better policing, then there would have been fewer banks and loans, but a higher ratio of good loans. That would have allowed the existing banks to be stronger and would have prevented a lot of the economic woes that we have seen over the last three or four years.

In the end, it is good police work, not social engineering that would have prevented this mess in the first place.