Regulation Can’t Make Us Learn From Our Mistakes
I’m looking at the headlines and all I see are more regulations on the horizon. There is not once that regulation does work, it never has, it never will, and for one reason: we never seem to learn when we screw up.
Leverage is a tool. You apply it to the capital you have to make your money work harder. In this case, leverage is to money as a chain saw is to a lumberjack.
Unless you have Paul Bunan, trees aren’t just going to fall. By giving a lumberjack a chainsaw you’ve increased his productivity through leverage. One man hour is now equivalent to dropping 20 trees, instead of the mighty number of 3. That’s a perfect example of leveraging productivity.
However, using the chainsaw implies responsibility. In the wrong hands its a weapon instead of a tool, one misplaced step could mean losing a leg. But in the right hands, its a tool that increases your own productivity, your profits.
The credit default swaps market does not need to be regulated, it needs to be less leveraged. There has to be more CAPITAL behind the system. When a market itself has reached a point that it is worth more than all of the amount of money in existence, its too big. Its too leveraged, and its a disaster waiting to happen.
We’ll never once learn from our mistakes. Not once. We’ll always over leverage or over borrow or otherwise just mess up. Some times we need to take responsibility for our actions, realize that maybe we were in way over our heads and maybe just once PAY for what we did. If anything our legal system needs an overhaul to enforce laws, not make new ones when the old are skirted.
It isn’t just laws being skirted. Plenty of laws were changed to specifically allow the over-leverage. We can put in place effective laws. They won’t be 100% effective but they can be useful. The problem we can try and address is putting good laws in place and keeping them their even if those with money want them changed. We get in big trouble a few years after politicians change the laws to benefit those giving them money which then create opportunities for abuse.
We will always have people pushing beyond the limits of the laws either illegally or by skirting the law with gimmicks that may or may not be legal. That doesn’t mean that government performing its duty to regulate markets can be abdicated. Capitalism doesn’t work without regulated markets. And I don’t think anyone has another reasonable economic model.