Wailing and Wallowing On Wall-Street’s Witlessness

By now most people have settled into their own perspective view on the relationship between Wall Street and the economic disaster that has been playing out over the last year and a half. You probably find yourself orbiting amongst other like-minded individuals that have become attracted to or attached to one of several conceptual-masses that make up the political galaxy. An American galaxy from which we can each observe the consequences of the super-nova explosion originating from the derivatives instruments that were created by our Wall Street superstars. And; as in any galaxy, there are higher concentrations of matter around those bodies/ideas that have done nothing more perhaps than pull in a greater amount of matter that was conveniently available nearby. These political solar systems, like their stellar gravity-well counterparts, can grow to colossal sizes and become all-consuming black-holes. Annihilating everything in their reach and permitting nothing to escape nor providing light to illuminate the darkness.

In gazing out onto this galactic star-scape, we can find systems that have congealed from the nebular residue of the melt-down which are composed of:

• individuals, who have lost all or nearly all of their savings, assets or income from pension/retirement plans

• small pockets of folks that benefited from the collapse for any number of reasons

• those who expect their tax burdens to increase in the future to account for the debt obligations that have been assumed by the Government to react to and mitigate the economic crisis

• some who see the Government’s interventions as an attempt to take control of the nation through ownership of key industries

• predators and vultures who see an opportunity to game, leverage or cheat the system and accumulate wealth and power from the desperation and fear following in the wake of the collapse

• leaders and captains of industry who are ready to rebuild the financial industries and markets, but with better controls and protections for the public

• politicians who either want to make sure that this never happens again, or who want to restrain or remove governmental involvement in the financial industry

• and there are those who feel that they were cheated, deceived and taken advantage of so that rich, powerful and well-connected people and groups would not be destroyed by their own folly

Across this space, the predominant constellations shaping your fate are being reformed by the enormous energies raging through the public ether and propelling the tumultuous shifting in the balance of financial powers that will establish your role in the free markets. The underlying sources of these energies are the public anger and fear released by the impact the recession had on peoples’ lives and feelings of security. Adding to this kinetic impulse was the deeply felt sense of injustice and unfairness that fomented out of the bailouts and self-serving abuse of the public purse by ear-marking politicians.

What then are our national leaders going to do to steer the ship-of-state through the new economic reality that has coalesced from the financial ‘big bang’ that created our fiscal disaster out of nothing, or at least created from investments that were based on nothing. We have one group that wants to reform the financial regulatory environment to “prevent this from every happening again”, and enhance and strengthen the regulatory oversight of the financial industry. Another group of course wants to rely on the power of free-market forces to correct the problems in the marketplace without governmental interference; being emphatic that the regulatory body played a notably culpable role in the current crisis.

It doesn’t matter which one succeeds in advancing their vision, since neither is right. How can this be you ask? Well, both of these positions and approaches were actual factors that contributed to the melt-down.

The regulatory approach that had been crafted over the decades requires broad access to information, knowledgeable and insightful regulators, and a range of authority that enables effective control and enforcement of the financial industry players. And the evolving financial businesses have found efficient ways to erode all of these factors to the point that they are sufficiently weakened to undermine their ability to protect the public from corporate greed and malfeasance of their fiduciary responsibility.

The free-market approach, while essential to a democratic and free society, cannot be relied upon to exist in a free society in an unconstrained or unregulated condition. When businesses are solely left to serving their own interests, they predictably stray from an open and competitive marketplace to one where these businesses will create barriers and obstacles to openness and competition; and in the case of financial institutions in failing to serve the interests of the shareholders instead of the self-interest of executives. One of the fundamental reasons that America has prospered over the centuries is that the Government is explicitly responsible for insuring that everyone’s freedom and liberty are guaranteed and protected, including being safe from businesses that try to exert control over free access to competition in the marketplace and in fulfilling their duty to investors.

The market failure was not caused by truly new factors. It was not caused by a confluence of events that have never occurred before. In fact, the failure was produced by the same factors and the same events that have caused most if not all of the previous market failures in the last couple of centuries. The market failed because the public, the financial institutions and the government were all participating in a fraud. They were making investments in something that had no underlying real value, that did not require any participation in the risk that was being taken, and that rewarded the companies engaged in promoting these irrational investments with no connection to the true value of the investments.

Solving the problem will require a better understanding of what enables the irrational exuberance that propels the public and financial industries into these lemming-inspired stampedes.