Too much…
Too much of anything is bad, and government regulation is no different. I have been asked time and again why I fear and dislike too much governmental intervention. Though I have written about this issue a lot, an example of a double-jointed pendulum provides a nice visual which provides an analogy to my reservations about nationalization: It is easy to anticipate the path of the pendulum when the joint is locked. However, when the joint is released the movement of the pendulum is totally unpredictable. This is a great visualization of chaos theory – where a small change causes a large amount of uncertainty. In short, the more complexity we add to the financial system, the more the unpredictability and randomness.
The current administration is trying its best to mitigate risk in the markets in order to prevent another financial meltdown of this magnitude from ever occurring again. However, I do not think that throwing money at the problem is a viable solution. The premise of a Capitalist economy is based on the survival of the fittest. However, the current president has been the complete opposite. Bailing out companies without requiring them to change their business plans (the initial auto bailout) or the new cash for clunkers deal (in which case if you bought a gas guzzler you get a $4000 rebate) are a few of the governments policies rewarding those who made poor decisions. I can accept (to an extent) giving people second chances, but punishing those who make good decisions makes no sense to me. Why should a person ‘A’ who has a 1998 Nissan Sentra not be allowed to trade in her car (because it is considered fuel efficient) but person ‘B’ be qualify for the program after buying a 2004 Hummer.
Lets look at the issue from a different perspective. The carrot and stick theory is a simple premise of how a market economy works (rewarded if you do well => Carrot, punished if you do badly => Stick). This theory has been completely violated in the past few months. One cannot reward good work with bonuses or let everyone get a rebate on a car due to government regulation, nor can one fire for inefficiency or incompetence due to Workers Unions. (I am completely in favor of what unions USED to stand for, but I find them a hindrance to business now a days). In short, throwing money at issues, legislating regulation favoring the few and curtailing business and bonuses is not the best way to approach the current situation. I am by no means saying that the bailout was not necessary, but we need to know when to say enough is enough.
It is important to understand that risk management is an evolving science and the current situation is unprecedented, the basic lesson remains the same – the more regulation and complexity that is added to the system, the less likely the risk managers are able to account for risk, making it a lot harder to remedy our current situation.
