Regulatory Rhubarb

In my youth when people talked rubbish we used to mumble loudly ‘rhubarb, rhubarb, rhubarb’; they soon got the message. It is sad that modern media are not fully interactive to apply the same technique. The trials of 2008 had the pontificating twits out in force.

‘Tighten your belts’ as they raked in more cash. ‘Stop human rights abuses’ while supporting their abusive friends. ‘Everything fine’ and going into bankruptcy, moral and financial, the next day.
Even better these pontificators have generated a new vocabulary, jargon geared to express simple concepts in terms that disguise reality and make those using them sound intelligent! What do we get? ‘Black Swans’ (from a book title), ‘rent seeking’ or ‘complex and secret’ (corrupt), multiple partner holder (from the AIDS practitioners) or ‘twitteratti’ (derogatory about people who maybe got it right?).
The latest mumbo-jumbo takes the biscuit.
‘Quantitative Easing’. Namibia’s friend in Zimbabwe will grab this with glee as it is code for printing money. And this is just what the financially huge nations are about to do, to put buckets of cash put into bank vaults to rehabilitate balance sheets and, through careful release, allow the new demon, disinflation (deflation?) to be limited by reducing currency values. A very nasty thought but …
Equally nasty is that the financial crisis that started by gross over-leveraging of ‘assets’ plus covering long term loans with short term debt is about to be trumped by nations and currency groupings and doing exactly the same with taxpayers money to absorb ‘toxic’ debt. Ouch!
Will it work? Approaching financial year-ends will force financial institutions to come clean as major audit firms are going to take a harder look at their ‘going concern’ evaluation to save their own skins. Time will tell, and soon.
Current ‘sheep think’ is that salvation comes through more government interference, regulation is the buzzword but as history has shown, regulators are always under-resourced and doomed to fail. Only a brave or foolish regulator would over-ride clean audit reports, the god-like rating agencies or the financial deities of Wall Street when things were going well!
Despite fervent promises (never again) in our increasingly complicated world, disasters will still occur. Bad times make regulation palatable; good times mean good intentions get lost.
An alternative? Any solution should take account of two factors. Economic and social progress requires money and risk taking is part of this process but in parallel, where the small people save prudently, their capital should be protected.
This distinction was lost when regulatory policy weakened to allow almost all financial activity to be consolidated under one ‘roof’. A system that proved economically efficient and convenient as the various components, investment banking, commercial banking, house loans, vehicle purchase, pensions, life insurance and even short term activity were, subject to limited control, lumped together. This ‘de-regulation’ progressively removed risk firewalls that had been empirically built up over decades through experience in each financial component. This protection was lost to computer aided risk models.
Add to this the demise professional partnerships and mutual groupings that divorced personal responsibility from professional actions. Responsibility became limited liability. The table was set for a disaster. It came.
The restoration of personal liability for professional actions, a re-division of the different financial vehicles into various risk categories and the return to ‘know thy customer’ seems to offer an alternative to penalistic and anti-creative regulation.
Remember without risk progress will stop but those who take great risks should be allowed to lose all or gain mightily. Such is human nature! Or maybe ‘Rhubarb, rhubarb, rhubarb’? – Chris Smith,
csmith@mweb.com.na