Posted by
Andrews on Friday, March 27, 2009 11:07:38 AM
Recently, I have seen a number of
nominal conservatives again calling for regulation. This time the argument being
some sort of jesuitical argument against derivatives as they aren't "tied" to any value. On paper it is an argument that may take some in, but it is, as any argument for limited regulation,
the camel's nose inside the tent. Once we can regulate investments not "tied" to values, what is to prevent someone from arguing all stocks are too "distant" form a concrete value? It is nothing but a lack of imagination that keeps someone from understanding where derivatives tie to something of value. So are we to base regulation upon someone's inability to comprehend an investment vehicle?
Then again, derivatives, by and large, are a symptom, not a cause. Though everyone is flailing about looking for a culprit, blaming mortgages, the CRA, Fannie and Freddie, derivatives, "Wall Street greed" and everything else, the truth is, all of those are symptoms, in one way or another, of our underlying problem. And that is
our unstable, inflating currency. Without any stability, and with constant, robust expansion of the money supply, we end up with far too much money on the market, looking for investments.
Derivatives are nothing but an attempt to create something stable in an inherently unstable environment. With the market being so distorted by inflation, investors attempt to create vehicles to ensure a constant return. In the past that would have been the purpose of bonds, or blue chip shares. But with inflation turning bonds into speculative investments rather than boring constant return investments, many derivatives were created to ensure relatively fixed returns. (A few also exist to circumvent restrictive regulations, but most are, by and large, efforts to create constant returns in a relatively uncertain market.)
Think about it, our ancestors did not lack the mathematical skills we have, nor were they any less sophisticated in putting together creative investment vehicles. And they were, for the most part, even less regulated than we are today. And finally, they were no less interested in making money, in turning a profit, or in seeing their investments grow in value as rapidly as possible. So why didn't they invent these complex package investments? Because they had no need of them. Until the closing of the gold window in 1973 money was largely stable. There was inflation, especially after the creation of the Fed centralized inflationary pressures, but, by and large, being tied to gold in one way or another, the quantity of money had an upper limit. And, that being the case, there was a limit to how badly the government, or earlier private banks, could expand the money supply. As a result, bonds were the vehicle of choice for steady returns. There was just no need to create complicated tools to ensure returns.
So, rather than calling for yet more government meddling to resolve a problem caused by earlier meddling, why not call for less. If we truly are conservatives, why is our argument not for "limited intervention" but for none? Why aren't we calling for a stable currency rather than a smaller bailout? Since when did we become the party supporting the ideas of Wilson and FDR? Who needs liberals when the conservatives are calling for bailouts and regulation?
POSTSCRIPT
As I mentioned parenthetically above, some derivatives and other accounting tricks exist to take advantage of various regulations, exemptions and other distortions introduced by regulation. However, that also makes my argument for me. Even though not the result of inflation, they are the
result of other government intervention. Without the government creating strange loopholes or forcing accounting tricks, there would be no need for such investment vehicles. Trust me, no investor wants an investment he can barely understand, and even those who hope to con people by creating overly complex investments have to have an environment where people are willing to buy. Without our distorted market, no one would want to invest in such overly complicated instruments, which would stop both honest mistakes and intentional fraud. So the solution still is not more regulation,
but less.