I introduced you to the two Bobs a year ago (Kodak-town andthe Two Bobs). They are kind of like one
of those old cartoons. You know… the cartoon character is faced with a moral
dilemma and up pops a devil on one shoulder and an angel on the other.
It all started a couple of weeks ago. Bob’s wife – my niece – invited me over for
steaks on the BBQ. While we were
munching on hors d’oeuvres, Bob made a comparative statement about job safety
that ended something like this “… or else we’d be just like Texas.”
“What’s wrong with that?” I said. “Texas is creating jobs!”
Bob was referring to the recent fertilizer plant explosion
in Texas, which he speculates was the result of lax regulation. I debated the point but not too
forcefully. (After all, I hadn’t had my
steak yet.) There needs to be some
regulation, we agreed. The question is
how much is too much?
On the other shoulder, you’ll find the other Bob, an old
friend. I had sent him a news item featuring an opinion by Vanguard founder
John Bogle wherein he asserts that our 401K’s should be diversified so that
unsophisticated investors won’t take too much risk. So far, so good except that Bogle also
suggests that the government regulate the holdings in these funds.
It’s an interesting idea.
There is clearly a social cost to 401K investors failing to achieve
their retirement goals. More pressure on
social security, Medicare, Medicaid and food stamps to name a few. Why shouldn’t government require sound
investment practices in exchange for tax-advantaged treatment?
I’m sure Bob would agree.
No, not that Bob. The other one.
As for business regulation, it is legitimate to ask how much
regulation is too much.
My answer is simple: when jobs are leaving the state (as they are in NY), it’s too much. Texas is creating jobs because they are at the
other end of the pendulum swing (or sitting on the other shoulder if you
prefer).
I’m sure Bob would agree.
No, not that Bob. The other one.
I don’t feel strongly about Bogle’s idea one way or the
other. However, I love a good debate and,
since Bob stands someplace to the right of Ron Paul on these matters, a great
debate ensued. What Bob believes is that
people should have the freedom to choose -- to be rewarded by their good
choices or pay for their mistakes. Bob identifies examples where industries
have regulated themselves to the benefit of both businesses and their
customers. It’s a great model when it
works.
An example of self-regulation in financial services is the
rating agencies, S&P and Moody’s. They are private companies paid by the
industry they are rating. During the
real estate boom, their customers (Goldman Sachs, JPMorgan, Lehman, etc.) convinced
them that Collateralized Mortgage Obligations should be AAA rated. The
banks hired top mathematicians, paying them 7 figure salaries, to develop
presentations to the poor dummies at the ratings agencies (5 figure salaries). We all know what happened next. Wouldn’t we be well served by a bit more
oversight on these activities?
I’m sure Bob
would agree. No, not that Bob. The other one.
Bob espouses a
principled approach. “First, people must learn from their mistakes… One idea
that applies here is don't put your money into something you don't understand.
Stupidity will hurt. Repeated stupidity will bankrupt you.”
He makes a lot
of sense. However, former Fed Chairman Alan Greenspan
famously posited that financial institutions didn't need to be regulated
because they wouldn't take risks that threatened their own existence. When
questioned by Henry Waxman following the credit crisis he admitted that his
"view of the world" was wrong. Little solace for the rest of us.
I am sure Bob
would agree. No, not that Bob. The other one.
Bob tells me I
have “way too much faith in government”. He would agree if he “thought they'd
ever be good protectors”. As bad as Wall
Street has been, the “government has
been massively worse”. Further, the “complexity of today's world” argues “against
a central decision-making authority with growing power to confiscate wealth”.
Still, I think some degree of government involvement is
necessary. I mean, weren’t we well
served by having federally insured deposits (FDIC) during the crisis?
I am sure Bob would agree.
No, not that Bob. The other one.
Now, where’s my steak?
WHO WILL LEAD?
