THE FUTURE OF FINANCE BLOG

If the Bathwater Becomes Toxic Enough, Throw Out the Baby

August 29, 2010

The more I discover about the modern financial system, the less I recognize it, and the more incredulous I grow.  And I worked at the center of the financial system until 2001.

My comment is prompted by the latest news that several leading hedge fund managers and private equity moguls are lashing out at the Obama Administration and funneling money, lots of it, to the GOP. For example, the New York Times reported that at a recent fund raiser at his Central Park West home, Paul Singer, manager of a $17 billion hedge fund, raised more than $1million for seven Republican Senators.  At a recent Manhattan Institute gathering he reportedly lashed out at “indiscriminate attacks by political leaders against anything that moves in the world of finance.”  According the New York Times, he goes on to say that government efforts to “take over and run” the economy through more regulations, threatened to ruin the United States’ standing as the world leader in finance.

Excuse me?  “Ruin the United States’ standing as the world leader in finance?”  This glorious leadership position just crashed the global economy, leaving a trail of wreckage that continues to worsen, with governments unsustainably indebted in the aftermath, while the prospect of prolonged double-digit unemployment settles in across the developed world.  The “leadership” of Bear Sterns, Lehman, Merrill Lynch, Fannie and Freddie, Citi, and finally Goldman Sachs, along with several high-profile hedge funds whose leaders are either in jail, under indictment, or barred from the securities industry for life, has made a mockery of the US financial system and our brand of finance-driven capitalism around the globe.

I understand that many in the finance industry played by the rules, performed admirably throughout the crisis, and are being unfairly painted with the same brush as the truly bad guys (let’s admit, they tend to be guys).  But why not lash out at those who ruined the financial system and continue on with their irresponsible and self-serving ways?  The big banks as a group remain significantly undercapitalized if honest accounting were employed, and realistic stress test scenarios were taken seriously without the assumption of another bailout.  Yet the bonus culture is back (plenty of capital for bonuses, long before dividends are restored), driven by increased monopolistic power and ongoing funding and yield-curve subsidies.  Where is the self-policing which is the only alternative to the impossible task to regulate modern finance in its current form?  Is it that firms like Mr. Singer’s are too dependent upon the JPMorgans and Goldman Sachs of the world to speak the truth?  What does this say about the so called “free market system?”

I’m attending a meeting on “Transforming Finance” over the next several days.  We intend to begin by asking the question, “What is the purpose of the financial system?”  Such fundamental questioning is where we must begin.  Increasingly, I’m of the view that the bathwater is so polluted, we may need to sacrifice a few babies.  No tears please.  These babies will be just fine.  The meeting is being co-convened by the Capital Institute.  Look there for a report next week, a project of Capital Lab.

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