It is a hard choice to trust our government these days. Immense budgets, inefficient actions, regulatory nightmares, lowered taxes, deficit spending, incomprehensible debt loads and that’s just at the local level. One of the main reasons for the swell of support for Obama is the hope that his election might change some of that. So the final chapter of Charles R. Morris’ The Trillion Dollar Meltdown may prove to be just what the doctor ordered.
Chapter Eight: Recovering Balance
Less is more. In a free market environment that dictom can and, according to Morris, has been taken too far. For by trusting to the market place to be self governing, we have come to the possible unwinding of not only the US financial markets but the world’s as well. The term writedown (the act of reducing the accounted value of an asset) has become commonplace to the current financial news. To Morris the real disaster, the elephant in the room, is the danger that the rest of the world’s confidence in American financial markets may be lost. To deal directly with this problem means,
Any program to restore confidence in American markets must start with the banks. Loans to very highly leveraged parties should carry penalty capital charges. Absurdities like prime broker loans to hedge funds that do not disclose ballance sheets should simply stop. Banklike capital requirements should apply to all lending entities, including intermediaries like mortgage bankers who plan to warehouse deals for securitization. Loan originators should always retain first losses, and put-back agreements should get much stiffer capital hits than they do now. Accountants shouldn’t recognize credit insurance purchase from thinly capitalized entities, which would put leveraged credit hedge funds and the insurance monoliners out of the riskier portions of the credit insurance business.
Reading the list above reminds me of my own feelings about banks. They always seem to be ready to help when you don’t need it. See the barrage of credit offers when your FICO is good. But don’t seem to know your name when the mortgage resets and a refi would really save the day. In other words, banks give the impression of not taking risks but as the list above and the first seven chapters of this book point out, that really isn’t the case. Morris cites, and he is not alone in this, the removal of Glass-Steagal Act controls in 1999 which then allowed the commercial and investment banks to comingle as one culprit that could be corrected.
As an example of another reason why re-regulation of the marketplace is a good idea, Morris takes a long look at the health care industry. Just like with the financial market you might have to stretch your mind a little bit to deal with that idea. See it isn’t about you and your doctor. It isn’t about the best treatment for your family. It is about how
America’s high-speed technology adoption cycles produce higher financial returns for drug companies, device makers, and aggressive medical practitioners, but often it is not good medicine and is very expensive.
Health care is a business, son. What a business is about is ROI. Patient care doesn’t rank very high in the listing of incomes next to manufacturing and producing cardiac stents or over-priced drugs. Says Morris, “Much of the problem stems from the insistence that health care is just like any other consumer market. It’s not.”
I wont pretend to know exactly how the Pareto principle is supposed to work but I can see clearly how it can be used by the free marketeers to justify their financial outlook. The claim however to this idea as being some sort of natural law of economics however begs the question. If all the wealth is concentrated in one sector while all the debt is in another, that only makes the world work for the 20 percent. The 15,000 who pull in 284 billion a year while the rest of us struggle to make do on an hourly wage. We need a market place reset. We need to stop worshiping at the alter of retirement luxury, of being rich, of having it all, and recognize the rule that says enough is enough.