Wednesday, October 8, 2008

The Regulations are Done!

From time to time, I venture on over to the other side to see how the thinking is going over there. Who was it that said "know thine enemy"? Sun Tzu? Did he use the word "thine"?

But I digress (and I joke).

I did venture over to The Nation, and read this fluffy piece of wonderbread (Born Again Democracy). It's all about how the federal government needs to take over the economy, and it's filled with all sorts of vapid proposals. At least at the end, the author admits that "These ideas and many others are in gestation." If there ever was a need for abortion, this may be it...

Anyway, it reminded me of a thought that I'd had recently, and that is this: we don't need to regulate, because it's already been done for us!

Consider: Set aside the rating agencies (and the complicit federal government) for a moment. Whose behavior was the most damningly irrational in getting to the present mess? Is it the people who took advantage of aggressive mortgages when they were available? Was it the mortgage bankers who swam in fees? The investment bankers?

No, each of those people had their own (albeit selfish) reasons for doing what they did. The most irrational among all of the players were the fixed income managers who bought all of the toxic mess which had been packaged up into CDO's. What were they thinking? Didn't they do any due diligence?

We don't really need to go into it, because that's history, but one thing is for sure: private markets are very good at recognizing mistakes like this and correcting for them. You can be sure that fixed income portfolio managers won't be buying a lot of CMO's with dodgy mortgages in them any more.

It's very hard to regulate an industry that isn't there. The recent troubles have effectively killed the CMO market - it doesn't exist! The regulation has already been done for us!

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