The Myth Of Limited Regulation And Limited Rewards
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Looking over some of the new financial regulation proposals and listening to politicians–which I never advise doing–there’s a new vibe about money and greed in the Beltway.
Gone are the trust in markets and the notion that people can self-regulate. Now, our officials are saying our trust free enterprise has been misplaced and has been squandered into greedy financiers who pushed hard for quick bucks, at the risk of long-term growth. For proof, all you have to do is look at the economic collapse, they say.
The new theory is that people should limit their reward-seeking. Turn their attention to long-term growth. Anything else is just greed.
The question that remains is: will this new outlook be any more successful than its ideological predecessor?
It’s doubtful.
Even though it sounds nice on paper and just glistens with a glaze of goodness, there’s a few things wrong with the theory. The biggest problem: it doesn’t represent human nature, or mass human consciousness.
People don’t indulge in significant risk, without the hopes of high rewards. Bank owners aren’t going to risk capital unless they can obtain a substantial return.
And before you scream about those greedy bankers, take a look at your own transactions. Would a person play a dollar lottery ticket if the maximum payout was $2. Even though it’s a hundred percent gain?
Doubtful.
Would you take a job that has a higher chance of turnover, higher risk, and more work for a couple bucks extra a month in salary?
Probably not. You would stay put. It’s just how the human brain works.
There’s another problem with the new economic philosophy. The policy fails to acknowledge that financial pain is part of growth and that separating failure from the system keeps the “fat cats” from understanding the other end of risk. If you risk much, you can lose much. But our “too big to fail” designation creates a massive culture of enablement.
Because here’s the real kicker: the same folks that these policymakers are kvetching about are the same ones they bailed out just a few months ago.
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
