It really beats me how some still seek to place the blame for this crisis on hedge funds and clamor for their extensive regulation and taxation, plus curbing the pay of alpha-producers, when hedge funds are the only type of institution which behaved in line with the fabled "free market capitalism": those which guessed wrong went under, those which got it right made it big.
One hears cries for re-engineering the financial regulatory system as if it was lack of regulation which caused all this havoc!
Today we hear from Europe about this big conference hosted by France – and apparently not attended by the US – where economic planners quasi-communists bewailed free markets while ex-champions of free capitalism beat their chest and proclaimed they saw the light and are now believers in state intervention.
And what if the US had been represented – with layers upon layers of laws and regulations, following a legislation-as-business model emulated from staid Europe, it is hardly the "Go West" of old.
Alone at my desk, reading about these things, with the S&P 500 again down 2% for the day, I hit myself on the head, how could I be so thick to keep being surprised by these antics now that I am fifty?
I am writing a book on behavioural finance and students of the brain know that morality and a sense of fairness are wired in the brain. The reaction to the antics is therefore emotional, comes from the wiring, but donning my investment hat I try to look at things coolly, with a skepticism I oil and try to keep healthy, and, stoically, smile wryly, and get on to the next item.
One makes money by following the trend or turning contrarian when the trend has gone too far on popular but false beliefs. All systems have a direction and all go too far. And healthy skepticism is an investor's number one tool because it lets him or her see a little more clearly than the fanatic next door.
What free market capitalism are we talking about when the boot is pressed to the floor printing money like crazy to fix a problem itself caused by the excessive printing of money by avowed Ayn Rand-ians? (I used to belong to an Ayn Rand club too, for a while, until I got to be the skeptic I am now and threw ideology out of the window.)
What's this humongous money supply going to create down the line? And how can we trust the driver to release the gas pedal and put on the brakes at just the right time? I was reading this article about hyperinflation in Germany in the 1920s (link).
and got to thinking that maybe a few years down the line we get our money replaced by New Dollars where each old dollar is worth a new cent.
So now hardworking savers are being taxed by 0% interest in order to shore up what we euphemistically call inefficient users of funds. That's free market capitalism for you.
Then again I am not in the hot seat executing policy and seeing what they see from atop the hill – maybe this tax on savers is a small burden to pay considering what they see as the alternative. Perhaps it is this thinking which is making the market sink further: if you do what you do because of what you see then you must be seeing something awful. Time will tell, or autobiographies of old folks when it is too late.
To recapitulate two main lessons of the century: assuming they ever existed, communism does not work nor do free markets. As a humanist, I hope upon hope that there is a grey central area somewhere in between which does, give or take a minor crisis every now and then.
How to find the centre? Throw away ideology, don the skeptic's hat, and abide by the one law which seems to have withstood the test of time: don't do unto others what you don't want others to do unto you.
Planned social economics? No. Free to choose? Yes. Rapacious banditry? No. Effective policing? Yes. Witch hunts? No. Peace and commerce? Yes. Duh!