Again, Oprah Winfrey’s wise rhetorical relationship-advice “How is this all working for you?” comes to mind when browsing through today’s Wall Street Journal, Money & Investing section page C2 and C3. When Oprah utters that question, she usually implies it is time to stop trying to fix the abusive relationship people have gotten themselves into, and instead grab themselves by the bootstraps and move on.
As hard as it may seem.
Time to move on
So is my suggestion based on the daily abuses of finance reported by the media. We must learn from our mistakes and move on to institute fundamental financial and economic reform. Reform that holds finance to the same stringent meritocracy as production. Away from letting finance roam free, without adequately defining the necessary rules of freedom.
Without singling out specific firms, but just for the far-sighted under us, all the headlines in the above photographed two-page section of The WSJ allege financial improprieties:
- Case Tied to Crisis Reaches Final Act
- Probe of Banks’ Resource Role Widens
- Barclays Bolsters Capital as Penalty Looms
- UBS to Pay Under $60 Million to Settle SEC Probe
- Ex-Analayst is Charged for Tipping Off SAC
- J.P.Morgan Settles in Trading Probe
Scary, because a financial system eleven times the size of production (as quoted by a Presidential advisor), has not only created a dangerous imbalance between finance and production, but the many improprieties are a testament of how many in finance have been, and still can play tricks with (other people’s) money.
In the pageantry of false positivity, one may conclude that the President is on top of things by deploying the SEC to crack down on the abuse of power. But the problem with finance is much bigger than the sum of the improprieties we happen to uncover.
The shrouded merit of finance
The problem with finance is that it is not held to the same meritocracy as the assets (production) to which finance is applied. And so the free-for-all of a laissez-faire sector has and will continue, to take advantage of its virtually unbridled and unquestioned freedoms.
Asset management strategies of finance for years have been allowed to diversify endlessly, and even invest in themselves. So much so that no one outside a financial firm can accurately establish the critical path of success, and measure the granular risk factors deployed by the investment thesis.
Despite their job description as the ultimate arbiter of risk, asset managers awash in more than ten levels of embedded diversification, actually know very little about the real risk to which (other people’s) amounts of money are applied. Hence their weak performance.
Don’t hate the players, hate the game
The problem with our Neanderthal implementation of freedom is that everyone who wants can take our dysfunctional systems for a glorious ride. We failed to recognize that for freedom not to damage the trust of those who rely on freedom, we need rules of “the road.” Rules that do not dictate a destination but establish regulations (like street signs, speed limits, etc.) that will be enforced along the way. Enforced by public testimony and embarrassment if need be.
Our government, unable to fully comprehend the gravity of the situation, now deploys an army of enforcers meant to prevent undesired outcomes. An expensive army that seemingly puts a “police officer” on every corner of the street, rather than revisits the flawed economics that is at the source of all this manmade evil.
Change the game
Handing out yellow cards to the players of our dysfunctional financial “games” will do nothing to ensure finance becomes a healthy arbiter and contributor to the evolution of production we must secure. Next time, the infractions will just be hidden deeper, in more complexity. Undiminished in occurrence, and still unable to prevent a reduction of adverse economic impact.
Production has always been held to the unrelenting merit of the marketplace. We now must apply that same merit to finance. Not by chasing down “the offenders” of the Neanderthal freedoms we deployed and have had no sensible rulings, but by creating a system in which the merit of finance, just like the merit of production, is verifiable to the public.
Finance must become a lot flatter and more straightforward. And by doing so, the public as the ultimate whistleblower will ensure the government can remain focused. And deploy its time and governance not to the players, but to the excellence and infinite evolution of “the game.”