For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations...
But even more important, from a structural perspective, our dependence on entities of this size ensured that we would fall prey to a "too big to fail" argument in favor of bailouts.Two responses are possible: One is to accept the need for gigantic financial institutions and the impossibility of failure—and hence the reality of explicit government guarantees, such as Fannie and Freddie now have—but then to regulate the entities so heavily that they essentially become extensions of the government...
It is time we permitted the market to work: This means true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win; and government investment in the long-range competitiveness of our nation, not in a failed business model of financial concentration and failed risk management that holds nobody accountable.
More at the link. He makes some very thoughtful points...
The acceptance of the current business model employed has done wonders to create the inevitable increase in bogus returns and over exaggerated profits which now rampages Wall Street and Main Street. The operation of business today is rattled with over exaggeration of assets purchased and retained for 20 some years and when the assets are found to be less then represented the whole thing comes crashing down. Over inflating the truth has in turn brought the lies to the surface to be exposed.
ReplyDeleteThe losers are the people that dedicated time and effort to keep the industries operating while the shareholders and principles believed the lies they where telling to one another about how leveraged or liquid they where, until the day of reckoning came to visit Wall Street. New business ideas and models with less foam at the top will need to be engaged. If the chosen business model creates success the entire operation must succeed. We have just seen what happens when the foam has disappeared and the liquid assets have gone flat.
The bailouts are only a lifeline to support what will not work in a service oriented society. When small to medium sized companies can not barrow money, then the working man will not be able to sustain deflation of personal assets, even with a short-term bailout for sustaining of the credit market. Solid support for business growth and maintaining operational assets are important. If the business model fails then the entire operation must fail, this is agreeable.