On Balance - We Need Balance

Here is a genuine fear heading into the times ahead - overregulation. The pendulum most definitely swang too far to the deregulation side of things (though some that I follow say our problems are still due to too much regulation, which I will discuss at the end of this piece), so the natural counter is to swing it back the other way, with a vengence. I certainly agree that deregulation was taken too far. Corporations were given far too much say in how to value their books, the nature and amount of debt they took on, and how they were allowed to report things. Aided, mind you, by ratings agencies willing to give a AAA rating to me securitizing a loan from my dog - she is good for it, honest. And now when the house of cards caves, it is time to fix the problem. My concern is that we may over fix the problem.

One problem may show its head in trade protectionist activities. Bailing the auto companies might be viewed as such. Another problem, and one likely more imminent, is replacing lax to no regulation and oversight to overly burdensome regulation and oversight. Moreover, government risks throwing the baby out with the bath water. Not every American corporation was a bad player here. Indeed, a good case can be made that the vast majority of American corporations were trying to do the right thing for their shareholders but have now been caught up in a recession and credit crunch not of their own making. Many may have gotten a bit addicted to credit, but it can be hard to resist when banks are throwing it at you with low rates. Still, most bear little blame for our current mess, and Congress needs to do what it can not to overburden them, especially when they are on the edge already, with costly over regulaiton.

The balance we need to achieve going forward will be quite difficult in this environment but someone (hopefully Obama) needs to keep a cool head and push for more, yet moderate, regulation. I am a big fan for doing enough but not too much. Keep the process simple and inexpensive as you can, but some regulation and oversight is absolutely necessary. Let's do away with some things that are welcoming trouble, like 40-1 debt to equity ratios, Level 3 assets, CDSs and the like and force corporations to be a bit more boring. You know, like cockroaches. Profits will not soar absent a truly great innovation or product - such as an efficient and economical alternative energy source, but that is a good thing. As it turns out, few (other than over-paid CEOs) benefit from make-believe profits. Yet to get there, we need government to work toward the right balance. With the social unrest building, pressure will be on to do more, but we need to move cautiously and deliberately in these times. Time will tell if we achieve the right balance.

http://www.bloomberg.com/apps/news?pid=20601087&sid=avJ43XHySeVs&refer=home

I mentioned that some still think that we have too much regulation, and government in general, and that is the problem, not the lack of regulation. One of them is Mish, who I follow. He can make a convincing case for doing away with the Fed, with Fannie Mae and Freddie Mac, with the alphabet soup of Fed facilities and with a lot of other government programs, much of which I agree with. I have ranted here against what the Fed is doing, the TARP, about pushing Fannie and Freddie to take on more junk, but there is a world of difference in my opinion between doing the wrong thing and doing nothing at all. The SEC did virtually nothing and we have the collapse of Lehman, Merrill Lynch and Bear Stearns to thank for it, not to mention Madoff. We do need to carefully consider our moves before doing them. That has been one of the major problems with the TARP; it was not well thought out to begin with and it keeps changing approaches, which does not inspire confidence. So Mish, I must disagree with you on being totally free-market oriented, though I agree with you on a lot.

http://globaleconomicanalysis.blogspot.com/

Disclosure: None