Cap This!

Lest we forget that the recent financial crisis has imposed real costs on the real economy, Simon Johnson of The Baseline Scenario reminds us, at length.

He claims that bailing out financial institutions considered too big or too connected to fail was the principal vector in the recent contagion, and he asserts we will have fixed nothing if we do not fix this:

9) At the heart of every crisis is a political problem – powerful people, and the firms they control, have gotten out of hand. Unless this is dealt with as part of the stabilization program, all the government has done is provide an unconditional bailout. That may be consistent with a short-term recovery, but it creates major problems for the sustainability of the recovery and for the medium-term. Again, this is the problem in the U.S. looking forward.

And in Europe, too, a point which Mr. Johnson makes as well.

His solution? Explicitly limit the size of financial institutions through the imposition of hard caps:

Punish the Monkey (and Let the Organ Grinder Go)

[Submitted by Josh Brown of The Reformed Broker]

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.