News item: “Nowotny added that speculation driven by hedge funds played a role in the slump of Greek and other peripheral euro zone debt, and that there should be efforts to curb those actions”.
News item: “European Union plans for regulating the hedge fund industry still carry “significant risks,” warned Britain’s Financial Services Authority, even though many of the stricter rules have been toned down”.
At first glance, it’s tempting to look at these two stories, each seemingly opposing the other, and say, “It’s no wonder government can’t get anything done, here or in Europe.” That was my first reaction.
And my knee-jerk reaction these days has been to favor more regulation of the financial industry, including hedge funds, rather than maintaining the status quo or slackening regulation. I read stories like this one about the commercial mortgage doom-cloud and it’s hard not to feel like bankers and the financial industry have not earned the freedom to act on its own. Government needs to step in and set some limits.
Who can read passages like this and not feel some degree of anger?:
“Small- and mid-size banks have been failing at the fastest rate since the savings and loan crisis of the 1980s and 1990s. The failures are due mostly to bad loans they made for commercial projects.
“Banks often lent too much for land and buildings whose prices were inflated by a real estate bubble. They also relied on rosy assumptions about the profitability of retail and office projects and did not consider the possibility of a severe recession.
“The report attributes the looming crisis to failures of bank management and supervision. It says banks made loans based on property values inflated by the real estate bubble. They sometimes acted carelessly “in a rush for profit,” the report says. Banks and their regulators failed to consider the possibility of reduced consumer demand from a severe recession, the panel says.”
“â€¦ failed to consider the possibility of reduced consumer demand from a severe recessionâ€¦.” Seriously. When I was growing up, lapses in judgment that led to damage resulted in curfews, the parental equivalent of tighter regulation; grounding, the parental equivalent of trading and lending restrictions; and loss of allowance, the parental equivalent of monetary damage awards. Sometimes negative reinforcement is the best way to mitigate bad behavior.
But as my father is fond of saying, one cannot legislate morals.
And, as it turns out, you can’t legislate behavior, either. If the regulatory shortcomings in the commercial mortgage artlcle highlight anything it’s that regulators will not and probably cannot be counted upon to regulate an industry as large as finance in a way that prevents bad behavior or mitigates bad decisions by individuals.
At the end of the day, it’s up to each of us to act not only in our own best interests, but in the best interests of society at large. Getting that message throughâ€”as opposed to ramming legislation throughâ€”seems to me now to be the more important, and maybe even more challenging, task.