The Economics Beat: Regulation versus Risk

Politics, Society, The Economic Beat

Welcome to what’s become a regular topic around here. ¬†We’ve been watching what’s going on to the economy for a year now, and thus far, our predictions have borne out.¬†

You will be able to find all articles on this topic under the category “The Economic Beat. Today we look at what’s been going on in the financial world, and consider what it all means.

Why Not Bail Out Lehman Brothers?

First, in the past two weeks, we have seen Freddie Mac and Fannie Mae get nationalized by the government, as they became more or less insolvent due to the sub-prime mortgage mess.  

We’ve seen Bear Stearns receive a subsidized takeover, where the government helped another company to bail them out, once again, because of fallout from the sub-prime mortgage mess.

We’ve seen the government nationalize insurance giant A.I.G. again, for insuring other companies and getting caught in the tar pit that is the sub-prime mortgage mess.

But, the most interesting of these recent corporate downfalls, is Lehman Brothers. ¬†It’s interesting because not because the government didn’t bail them out, but because of why. ¬†

In all of the previously mentioned cases, the corporations were rescued by the government, because they had played a high-risk position in the markets, which if they hadn’t been bailed out by the government, when they failed, would have rocked the global economy to the core. ¬†

But Lehman Brothers, while also a victim of the ever-growing sub-prime mortgage mess, stayed away from the riskiest positions in the derivatives market, where the others played fast and loose, with their own, and other people’s money. ¬†

By exercising a modicum of reasonableness, they wound up in a position where the government didn’t see the economic sense in rescuing them, and due to the billions in losses, came to the end of their rope.

Why We Are In This Mess, To Begin With

The answer is simple.  It all comes down to a blinkered conservative view of the economy, where the assumption stands, that getting government regulation out of the way makes the financial markets run better.  

The problem is… if you get rid of the regulations, and it all goes in the toilet, then you have to have that self-same government, that is no longer regulating that industry, bail out the players, one by one as they go into the toilet, to prevent global economic chaos.

Floyd Norris at the New York Times put it this way “If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops.

Regulations have been done away with, over the past dozen years, which had they stayed in place, would have prevented this entire catastrophic financial system melt down.   

Because of the lack of regulation, the markets are forcing regulators to choose which companies to save, based on how damaging their failure would be to the global economy, and which companies just didn’t screw up big enough to really break the global economy.

At this point, we’re down to two remaining financial giants on Wall Street, and we can only hope that the regulatory arm of the government can begin putting in place rules to prevent further economic upheaval.

I’ve been watching the organic development of this problem for years, and only about a year ago, suddenly realized what was going on. ¬†

The commentaries I’ve written here have played out more or less accurately, and once again, I’m going to strongly recommend that you keep yourself in a solid, cash strong position and keep solvent, for your safety, and as the economy eventually starts to turn around, to be able to cash in on the bargains that will develop as others sell off, to stave off financial ruin.

One Response

  1. [...] more things change, the more they stay the same. ¬†Take away economic regulation, and let “conservative” financial players run things, and you wind up with [...]

Leave a Reply

Allowed tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>