The boss has hung you out to dry
And it looks as though
they'll punish the monkey
and let the organ grinder go
— Mark Knopfler, Punish the Monkey
When ex-Dire Straits frontman Mark Knopfler put the song "Punish the Monkey" on his 2007 masterpiece solo album, he probably had no idea how prescient its lyrics would soon become.
When I think about the next wave of regulation headed toward a brokerage firm or a bank near you, my main hope is that the rule-makers are focused on the "organ grinders" themselves rather than on the proverbial monkey. The monkey, who has merely been dancing to the only tune available, has the most to lose in a regulatory overhaul. It is the organ grinders who can usually find a way to keep the largest portion of the profits toward the top of the the organizational structure, even in restrictive environments.
While you cannot legislate every instance of unrestrained greed, avarice, recklessness and fecklessness out of existence on an individual basis, you can certainly make laws to prevent entire corporations and industries from the mass adoption of these non-virtues.
To single out one or two groups of the financial-industrial complex (say, traders or advisors) for extinction-level scrutiny would be to ensure that the next great scandal arises out of the intent of some to subvert the new rules.
Rather, the regulatory arms should attempt to wrap themselves around the root malefactors of our present predicament. I'll save everyone the time of trying to guess whom those malefactors may be: The top five anointed investment banks who've been socially-engineered into their "too big to fail" and "too favored to compete with" status by the regulatory bodies themselves. It was the apocalyptic greed and insatiable appetites of these firms, coupled with a laissez-faire culture overseeing them, that allowed for the growth and malignant rot in all of our post-millennium bubbles.
My suggestion to the reformers is to empower second and third tier competitors so as to create a deeper and wider pool of competence. With a decentralized lending, trading and investing mechanism, we can more easily cordon off the weakened and rogue firms so that no one is above being taught the cautionary lesson of failure and bankruptcy.
To just pass more restriction and make the business of business more onerous for all participants would be the very definition of punishing the monkey. Instead, let competition thrive so that other players can serve as the ultimate safeguard against a Bear Stearnsian vortex of risk.
The next time a Banker-CEO's eyes prove to be too large for his stomach, there will be others to absorb the damage and advantagously clean up the debris before it maims the taxpayer.
Free markets and relentless competition, not the old government-sanctioned Pentarchy of I-Banks.
Joshua Morgan Brown
The Reformed Broker
December 6th 2009