Tuesday, January 6, 2009

A Voice in the Financial Desert

If you are interested in a different idea about just how we got into the current financial mess and how we go about getting ourselves out of it, you should read this weekend's two part New York Times Op-Ed from Michael Lewis and David Einhorn.

The first part is entitled The End of the Financial World as We Know It. The real value of this piece is the fact that it does not fall back on the conventional wisdom to explain how we got into this mess: Namely, deregulation (the standard whipping-boy of the left) and irresponsible lending fostered by Freddie, Fannie, and the Community Reinvestment Act (public enemies number #1, #2, & #3, not necessarily in that order, according to those on the right).

Bypassing these usual scapegoats for the current state of affairs, the authors offer a far more plausible culprit, incentives. They argue that Madoff's ponzi scheme, clear failures by the credit rating agencies, and the apparent ineffectiveness of Treasury's response to the financial crisis are all unsurprising when you examine the incentives that existed (and that unfortunately continue to exist in many cases).

The second part, How to Repair a Broken Financial World, includes a short list of items that could be put into place to try and prevent this whole mess from recurring. The authors describe these changes to our financial system as, "perfectly obvious". Given the recent record of our leaders in Washington, this almost guarantees they will never be implemented (or, if they are, they will likely be unrecognizable).

If you are looking for a concise, informative, and refreshing discussion of our current financial state and some common sense approaches to finding our way out of this mess, be sure to check out these two pieces.

PS For those of you new to blogs, just click on the words, "The End of the Financial World as We Know It," and, "How to Repair a Broken Financial World." These are links that will take you right to the articles.

PPS For those of you looking for a good read, check out Liar's Poker by Michael Lewis. It is his account of working on Wall Street. Don't be put off by the subject matter. Liar's Poker is not a book for financial wizards who just happen to have a little interest in reading, it is a book for readers who just happen to have a little interest in what goes on in our financial sector. These days that should include everybody.

1 comment:

Steve said...

No, I suppose greed does not summarize the Ponzi schemes and shenanigans that Wall Street brokers perform for their own short term interests. And the two articles do pretty well pin-point by example what has been going on for quite a while (I'm not going to say I saw it coming (intuited would be a better word) for quite a while -- well, I just said it didn't I). But do you really think the problems of a "free market" capitalism can continue as it has been traditionally by asking people to stand up and say "whoa, this isn't right, I shouldn't be making a million dollars a year by trading paper? I think it's going to take a more drastic change, like "getting rid of all the "middle men", traders, brokers, hedge-fund managers, etc. Sound like socialism? Yes.