No Bull
On Ethics, Deregulation and Financial Chaos
By William A. Cohn
18/09/08 -- - "
ICH"
---The once mighty bull has fallen and can’t stand up.
As the financial system implodes, basic ethics teaches that such
chaos was a foregone conclusion. As one fund manager noted in a
BBC interview this week, “The system demanded ever-greater
leveraging. Those who acted with caution would lose their jobs
because their returns were not competitive.” But don’t those who
manage others’ money hold the legal and ethical duties of a
fiduciary? Mustn’t they act with caution? And isn’t government
regulation the only way to ensure that pensions aren’t
recklessly squandered?
Ethics 101: Ethics - the critical analysis of morality (our
beliefs about what is good and right) – is concerned with the
conditions in which decision-making takes place. Public policy
in recent decades has been rooted in a misread of history and
economics, fostering a financial system of Russian roulette.
Writing in the 18th century, Adam Smith explained that a
watchful eye must be kept over money managers because it is
human nature that people will never be as careful with others’
money as they will be with their own (see The Wealth of Nations,
1776, and “The Greed Cycle,” by John Cassidy, The New Yorker,
September 23, 2002).
Congressional investigations following the stock market crash of
1929, the 1987 stock crash and the dot.com bust of 2000-2002
underscored Smith’s wisdom with findings of widespread insider
trading, stock price manipulation and other malfeasance. Yet
since 1981 when President Reagan stated in his inaugural address
that “government is the problem,” policymakers have exhibited
shocking ignorance and neglect by taking a hands-off role.
US government policy has encouraged recklessness – most recently
by taking extraordinary measures to privatize gains while
socializing losses. As part of the agenda of its so-called
ownership society (excepting ownership of responsibility by
powerful bankers and insurers who fail) the govt. even sought to
privatize public obligations – recall the Bush proposal to
privatize social security. So why not play fast and loose if the
rules are heads I win tails you lose?
The wrong-headed policies of recent decades have now forced the
US govt. to nationalize the country’s largest mortgage lenders
and insurance company in order to avert an overall economic
collapse. And the whole world is feeling the pain (global
markets are hard hit, the British government is now also bailing
out its biggest business losers at taxpayers’ expense, and the
European Central Bank and the Swiss, Japanese and Canadian
central banks are all spending billions of dollars of their
taxpayers’ money to stop the bleeding). Yet, still, Senator
McCain and many other powerbrokers deny the need for the
obvious. The problem isn’t greed in itself Mr. McCain, but
rather unrestrained greed. The solution is not another
government commission or blue ribbon panel to issue a report. We
must empower the Securities and Exchange Commission (SEC) and
other regulatory bodies to do the job they are meant to and
obviously need to do in order to serve the public.
Following the Great Depression, securities laws were passed
requiring that investment risk be clearly spelled out for
investors by requiring that extensive public disclosures be made
in plain English, and that government (the federal SEC and state
regulatory agencies) actively oversee the financial industry.
But SEC and other regulatory oversight and enforcement action
against abuses have become lax, and the public has been left in
the dark as to how their college savings and retirement accounts
are actually invested. Mortgage-backed securities and
collateralized debt obligations have been repackaged into
seemingly safe investments, making a mockery of the core
principle of known risk for investors. How come we never heard
of CDOs until things went bust?
Joseph Stieglitz won the Nobel Prize in Economics in 2001 for
his work on information asymmetry which debunked the
neoclassical economic assumption that markets are generally
efficient. He recognized that well-functioning markets require
access to all information relevant to assessing risk and return,
and found that since such is seldom the case the efficiency of
markets is generally enhanced by government regulation.
Policymakers have pretended that the financial markets are
self-regulating for far too long. The pretense is now over. No
more bull. Merrill Lynch is gone along with a host of other
pillars of the financial world. Tom Wolfe’s Bonfire of the
Vanities tells us much about the peril of greed and waste run
amok, as does Enron et al. We must help to prevent good (and
bad) people from doing bad things by creating the right
incentives.
The bull has indeed been stripped away. Located at the base of
New York’s financial district, the Merrill Lynch bull was the
very symbol of unyielding confidence in the financial system.
That system has now clearly gone awry.
Markets are not natural; they are created and operated by
people. And it is up to us to ensure that they are operating
ethically – in a manner that is proper and good. No need for
hand-wringing, head scratching and commissions. Though it will
not be easy to heal this self-inflicted wound, we need only look
back to see the way forward.
William A. Cohn is a lecturer at the University of New York in
Prague ( www.unyp.cz ) where he
teaches courses in law, ethics and logic.Click on
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