What's up with Our Country's Financial Leaders?

Something that has always bothered me about the investment world is that it is run by a group of well-educated, intelligent people who seem too often to make terrible investment decisions. As I understand it, a good share of the “market” is controlled by a fairly small group usually identified as institutional money managers, mutual fund managers, investment brokers, corporate leaders, insurance company money managers, big bankers, etc. These are people who handle huge sums of money day-in-and-day-out and seemingly not too well sometimes – as in 2008. In addition to the above, we have well-educated, intelligent government financial people at Treasury Dep’t and Federal Reserve who have been seemingly caught by surprise and who appear to be stumbling around trying to belatedly correct the most recent recession by throwing money to some big banks, insurance companies, and corporations.

It is more than a little scary for lay people, having only a rudimentary understanding of “markets”, to see their life savings (like 401K’s) depreciate 20 to 40% in a few months, see family and friends suddenly unemployed (at 6.7% maybe heading to 10%), see property values decreasing rapidly (resulting in record mortgage defaults and up-side-down mortgage positions), reduction in government services (that many in our society rely on), etc.

Then we get the explanation for the recession. They tell us it started with sub-prime mortgages and the bundling of this paper to be sold around the world. Why would well-educated, smart people trade in these things when it is so obvious that it is a “house of cards” ready to fall apart? Also, we learn that huge, historical icons of American Corporations, like “Big Three Auto Companies”, are poorly managed, surviving on “smoke and mirrors” and are only a few weeks from being broke. We see large, highly respected investment houses like Bear Stearns and Lehman Brothers go under. We see big banks that have existed for generations going broke, being sold at auction, or being bailed out with infusion of massive amounts of government money.

Then, you add to this the rather cavalier attitude that many financial people have regarding these market swings. It is like, “Sure we are going to have these from time to time, it will correct itself, and we’ll be up and running in no time. Just hang on, don’t panic and cash in, maybe carefully move some money around to reposition yourself; but mostly, just relax.” I’m sitting here thinking, why is this normal, why is it so readily acceptable, and why does it happen at all with well-educated, intelligent people managing these financial affairs and these corporations?

Then the real kicker is that if one questions the functionality of our “free-market/capitalistic” system it is like you are committing blasphemy! Suggestions of regulations for the financial/corporate world is a really big, “NO-NO”. These people who have been responsible in large measure for this mess have never seen a regulation they like; and given the choice, they will applaud most deregulation. They insist that regulations will stifle the “free-market/capitalistic” system and its wonderfully self-regulating ability to create wealth for us all. The amazing thing is that they can say this with a straight face while “bellying up to the bar” with their open palm extended for government bail-outs. Then when it is suggested that they be held accountable for it, they are aghast, “What do you mean we have to tell you how we spend the money, how unreasonable. We know how to run our businesses and the worst thing that can be done is to get the government involved. And, by the way, if this isn’t enough money, we’ll be back to you when we need more.” Why do they hold to the archaic view of preserving a “pure capitalistic/free-market” economy? We haven’t had this system, other than in name, for about a century. We have a “mixed economy” with heavy government involvement that experience has shown us is needed to prevent illegal, unethical, ill-conceived, and abusive practices. Unfortunately, we evidently don’t have it quite right yet.

I’m sorry that I have no definitive answers to the questions I’ve asked throughout this column. I think they are worth some contemplation. But, in the mean time, our best choice might be to rely on carefully crafted government regulations that establish a delicate balance between freedom and controls that don’t unreasonably hinder the market system. That is the challenge moving forward with our “mixed economy”. We will have to constantly adjust the ‘rules-of-the-game”. Our aim should not be to eliminate risk, without risk you stifle innovation, creativity, and growth. But, maybe we can curtail the “lemminglike psychology” that overwhelms the entire market too frequently.