Sanity

Finally, some reasonableness amidst this insane political period and the current economic downturn.

High Finance, Laid Low

"It is often wrongly said that the present problems originated in the mindless financial deregulation begun in the 1980s, as if everything would be fine if the old financial system had remained. Actually, the old system -- dominated by banks and savings and loans -- collapsed. Many S&Ls failed when high inflation raised interest rates on their short-term deposits above the levels on their long-term mortgages. Banks suffered huge losses on energy, commercial real estate and developing-country loans. Securitization and other new forms of financing filled the void left by weak banks and S&Ls.

So modern finance has a split personality. Greed, shortsightedness and herd behavior compromise its usefulness. But regulation cannot cure this dilemma, because regulators can't anticipate all the problems and hazards, either. The best protection against human fallibility is to insist that major financial institutions have ample capital to absorb unexpected losses. Paulson's recommended reforms barely dwelled on that; Congress should."

Everything Samuelson says here, is sound, I think, though I think people like Samuelson and the surrounding democratic discussion and democratic and financial institutions would be better off insisting on financial institutions having ample capital than Congress passing a law to make it so. A more reasonable investing philosophy less subject to greed and quick profit turnover would better prevent such problems and make them all more money, I think, with Warren Buffet's success during this period being the best example of that point, but that can hardly be legislated. Congress could pass a law. And reasonable institutions would likely comply, more because it is a good idea than because Congress said it. And such a requirement could only apply to institutions which have large amounts of capital, of course. Everyone else will just need to learn to invest more wisely and with a more reasonable idea of returns to be seeking and the tendency of the market to leave people trying to get rich quick getting poorer much more reliably.

The truth is that there just isn't anything that can be done to prevent greed and the unsound investing it produces. It's as futile to legislate it away as it is to legislate away gluttony, vanity, sloth, lust, envy, or wrath (though actual violence - not metaphorical versions, either, for all those looking for an angle on that argument - associated with any of these must be dealt with). All such sins are endemic and timeless feature of humanity as much as any of the virtues that humanity rightly values and celebrates.

The best financial wisdom teaches these values in the context of finance. If you doubt that, I highly recommend Benjamin Graham's Intelligent Investor. There is a reason that Warren Buffet has made all that money. And this question has everything to do with that. The market, and the people who make it up, really do and will reward virtue, in the long run, often after periods like this where their greed and other vices get the best of them.

Economic and all sanity is found in taking all that wisdom seriously and being honest about the places where we do not. What liberal values and liberal economies offer us is a much stronger and open opportunity to be honest about that wisdom and about where we fall short. Illiberalism and our propensity to use force to get our way has always undermined the probability and capacity for us to get honest with ourselves and one another about our mistakes and shorcomings, because it makes people more afraid to be honest, even with themselves, about those failings.

Progress is found in our recognition of this fact of life, our propensity to engage in the hubris that we have somehow escaped its reach and our tendency to fall short in our pursuit of virtue.

Virtue is found in our honesty about our propensity to fall short. Even financial executives. All of us. And in the wisdom to let us learn from the lessons rather than giving in to the temptation of illiberal and repressive practices, policies, and impulses that compound our problems - by shutting down that freedom and the honesty and responsibility that come with them - rather than curing them.

Finally we seem to be edging toward sanity.