Quote for Discussion: Financial Regulation

(11:30AM EST – promoted by Nightprowlkitty)

Some will argue that limiting financial institution leverage will render these businesses less profitable and less competitive with non-U.S. companies.  HCM’s response is – “so what?”  Perhaps less profitable investment banks will result in more of America’s talented students becoming scientists, engineers, doctors and teachers instead of investment bankers and mortgage traders. What would be so terrible about that?

~Michael E. Lewitt, Managing Member and President of Hegemony Capital Management, writing in the subscription-only Welling@Weeden newsletter for the clients of Weeden & Co. LP.  This excerpt of the article, which is not reproduced with permission but contains no advice or information that could be considered proprietary, is a long list of suggested regulations which Lewitt believes are needed in today’s financial markets.

The events which are taking place in today’s financial markets are bewildering to the uninitiated, and are only slightly less scary to those who are familiar with the concepts and terminology inherent to this world.  But it strikes me as significant to see so many people within the world of finance calling for drastic reform and desperately trying to demonstrate that the problems which are blooming now are the spawn of seeds planted in previous years and decades.  And one thing that a few such as Lewitt are saying is that perhaps it simply is unwise for us to pursue the sort of gains which have fueled Wall Street for the last quarter-century.

In his essay, Lewitt states, “At some point, society has to figure out that the way an investor earns his money is even more important than the amount of money he makes.  This is why human beings were vested with moral sentiments, so they could distinguish the quality of human conduct from the quantity of its results.”  I don’t know that I agree with this statement – by which I mean not that I consider it to be untrue, but I’m unsure that this isn’t already the case.  There are already significant status rewards (which, as Lewitt quotes from Adam Smith’s Theory of Moral Sentiments, were considered by Smith to be utterly entangled with market behavior) which are independent (or at least interdependent) with financial rewards.  Paris Hilton may be richer than Zooey Deschanel, but the public grants Deschanel far more esteem (although Hilton is clearly a savvy businesswoman, and Deschanel is also a beneficiary of nepotism).  Meryl Streep may not be wealthier than her agent, but again, has a far higher status reward.  The heirs of Sam Walton may be rich, but they are widely despised.  Leona Hemsley and Martha Stewart can also tell us much about how society in general does consider how people make their money to be quite important.

Still, I find this to be a fascinating topic for discussion.  And the quote in particular is illuminating.  Perhaps the regulatory scheme for investment which does not regularly court disaster will be significantly less rewarding (although, as Lewitt points out, creating the best, most transparent and “safe” financial market – beating the competition at regulating – would be a significant inducement for potential investors).  In which case, the incentives for talent to go to investment banks, hedge funds, and the like will change.  Which would result in a pattern shift of where talented and ambitious Americans seek to make their careers.  And that is an interesting idea, although not an outcome I think we can actively attempt to realize.

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  1. …this is a bit more commentary than I usually add in Quote for Discussion pieces, but this one needed some context in my opinion.

    • Edger on July 12, 2008 at 12:16

    Could such an idea even work? Certainly it seems to me that it would be an attempt at devising regulatory frameworks to encourage long term sustainability for socially responsible business as opposed to an anything goes with no restrictions “war” for short term gains to beat out the competition and maximize profits and cashflow, but are there any parallels we can look at?

    How successful have other attempts at legislating morality been?

  2. Reenact Glass-Steagall; and return the U.S. economy to manufacturing, instead of the speculation which is so lucrative and which produces nothing of true worth.

    I know: ain’t gonna happen anytime soon.  But it’s what’s needed–and it’s what grew our economy from WWII right up until St. Ronnie.

    • robodd on July 12, 2008 at 17:45

    why don’t american corporations actually produce a tangible and beneficial something to make money–instead of just coming up with the latest paper accounting/investor scheme?

  3. Once again it seems to me that as the market is part of society a necessary part it should be regulated. Historically when it is left to it’s own devises it since it has no inherent value other then making money, it rains havoc on the world. On a pure level it’s killing the golden goose, literally. Why should the ‘market’ a vehicle for  buying and selling, a means of commerce, be allowed to operate without regulations?

    If corporate entities are legally considered ‘people’ then they should be held accountable. They can’t have it both ways, unfettered license to profit with no accountability and yet be considered the sacred cow of our economy. the untouchable concept that is at a total disconnect from societies gains.  

    The empty concept to which we are all chained,free market, is a entity which by it’s very nature, needs to have a societal benefit, other then profit. Profit means what?  The profit factor means nothing when it’s just funny money, derived from destroying both the societies it buys and sells to and the actual earth itself. The government at this point is just a ATM which funnels money and muscle to the criminals who are allowed to call this pillaging our economy and have no concern for the effects on the world.

    btw Shahyar did not write this Shaharazade did. My computer is still at the geeks, so I got up early and used his.                

       

    • Robyn on July 12, 2008 at 18:05

    result in more of America’s talented students becoming scientists, engineers, doctors and teachers instead of investment bankers and mortgage traders. What would be so terrible about that?

    What would be so terrible?

    It’s already the case that our more talented students become “scientists, engineers, doctors and teachers.”  There is rather a matter of value assigned by society to being a greedhead than one of those other things.

  4. It’s greed…

    As we are seeing with all of the (oil etc) speculation going on now. What is the cost to those on the sidelines, while a few get rich?

    This sounds REALLY good to me,

    …although, as Lewitt points out, creating the best, most transparent and “safe” financial market – beating the competition at regulating – would be a significant inducement for potential investors

    giving stability to all the non players whose 401k’s… whose retirements…have bee forced into “the market.”  

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