Monday, September 22, 2008

Long-Term Cures

The financial markets are like a patient who keeps turning up at the ER, waiting to be patched and to be sent back to the streets to do whatever made that person so sick in the first place. Yes, the patch-up is necessary, but it will not be enough. This patient also needs long-term medication and behavioral changes. If those are not instituted we will just end up in this very same situation again and again until the final crash kills the market.

From another point of view, the real illness in the financial markets may be diagnosed as greed-induced lack of trust. To cure this illness we need to return trust and harness greed within some suitable limits. Here are my very simple and basic suggestions about how to achieve this.

First, create proper regulations for the financial markets. The free-marketeers have been telling us for decades that regulations are evil, that they suffocate the adventurous and creative spirit of the markets and that they shouldn't be enforced. And the government listened and stored these words in its heart (if it has one) and Phil Gramm made sure that the regulations no longer stifled anyone. Then of course a market which deals in fortune-telling and guesses and imperfect information and leveraging and pure adrenalin went crazy. Imagine, for a moment, what a baseball game would look like if the umpires were not allowed to say anything at all, and imagine then how the game would change ( would there be hired killers to shoot the pitchers of the other team?) and you can see why the stock market needs regulations (rules) and regulators (umpires). Of course, the stock markets matter much more than baseball games, but you get the point.

Second, stop ignoring the anti-trust regulations. Stop letting one fish eat up all the other fish, stop that enormous bubble-fish taking over the whole market. There are several reasons for enforcing the anti-trust rules which we still have in the books. They range from the nastiness of having just one firm to buy from and the power this gives to that one firm to charge a lot to the present crisis where some firms are so large that we have to bail them out even when they don't deserve such a bailout at all. There are many different economic models, true, but none of them advocate monopolies or oligopolies in all the crucial industries, yet that's the way the Republicans have steered the markets.

Third, make sure that the bailing out doesn't reward those who are major culprits in causing the crisis. Make sure that the authors of the crisis get full credit for it (Phil Gramm, I'm looking at you), that all those conservative thinkers who created it get forever remembered for creating it.

It will not be possible to fix the crisis in a fair way, a way which would not punish the innocent or reward the guilty, and neither will it be possible to fix it without a lot of pain. But at least we can use the opportunity to make sure that future crises will take longer than a few decades to appear and we can make sure that those who advocated the relaxing of all the protective rules and regulations get that reputation eternally attached to their names. Why? Not only because of the sweetness of revenge. The main reason for that is something called "learning from experience" or just "learning", and if we let others obfuscate the real causes of the crisis we are not going to learn what is necessary.