Money money money money (money)
I’ve figured out the financial situation.
Well, that’s not true. What I’ve figured out is why a pure free market economy, with no regulation, has no hope of working. Or rather, I’ve figured out a way to explain it in terms that makes sense to me.
(I guess I haven’t figured out a damn thing, if I had to be honest. Still: this makes sense to me. It makes sense to me! That counts for something, right?)
Here’s how I break it down. The free market economy is like a car. Back in the 40s and 50s, cars were simple. Drum breaks, carburetors, rear-wheel drive, manual transmissions; anybody could work on ’em, and most folks did. Anybody could change the fluids, gap and replace spark plugs, tune the engine, etc. You might take it in for the really complicated stuff, but I think my father once told me he replaced the piston rings in an old Mustang he had, hardly a simple job.
Along the same lines, for most of history, investing was simple: you found somebody you trusted who needed money to start a business venture, and you gave ’em a few bucks and hoped to double your money. After a while, it was formalized into stocks and bonds, buying and selling. Pretty tame; you bought a stock, it paid dividends, the price went up or down. Hard to predict, but easy to understand, and over the long term, things tended to go up.
After a while, cars got complicated. Front-wheel drive, automatic transaxles, fuel injection, computer-controlled ignition. I’m pretty mechanical-minded, but all I can do with my Saab is change the oil and brakes. There’s something wrong with the turbo; don’t know how to fix that. Check engine light is on; I could probably get the code, but Lord knows it’s probably an oxygen sensor buried deep in the engine that I can’t get to.
Same deal with financial products: around the turn of the last century, people started “selling short,” which means betting on stocks to fall. This isn’t particularly dangerous on its face, but the problem is if you’re buying stocks, you can only buy as much as you have money for. When you’re selling short, you basically BORROW the stocks and then sell them to someone, and buy ’em back to return ’em to the guy you borrowed ’em from. (It’s slightly more complicated than that, but that’s the gist.) The problem is, unless there’s a regulation preventing it, there’s no limit to the amount you can short sell, because you don’t have to actually own the stock to do so. End result: October 1929. Stock market crash. Depression. Immediately after this, regulations were put in place such that you can only sell short a certain amount, based on how much cash you have laying around.
And then again, in 2008, after years of deregulation, banks are allowed to move money around in ways few people understand. Lenders are allowed to make loans to people who are high credit risks, because they can then turn around and sell the risk off to some investor in a credit default swap. No average person can be expected to understand all this himself, so he hands his money off to an investment professional, just as the average American takes his car back to the dealership for basic service.
Now here’s where the analogy breaks down: imagine you paid your mechanic and got your car back after service, and a few days later the entire car fell apart, Bluesmobile-style. You would, rightly, be very angry with the mechanic, right? You would expect him to repair your car, and probably get you a rental to drive around for your trouble, right? Of course you would.
Unfortunately, if you give your money to an investment professional, and he blows it all on credit default swaps, he can blame it on an economic downturn. All the while, he’s taking his usual commission.
If your car starts acting funny, you know it right away. The check engine light comes on, or the brakes squeal. Something like that. You know to get it fixed right away. With your investments, you mostly have to rely on our investment professionals to tell us, something that they are loathe to do because they know if we knew how incompetent they were, we’d take our money away. Sure, they send out quarterly “statements,” but most Americans throw them into the trash unread. Why would they worry? They’re years away from retirement! So most Americans had no idea what was going on until they watched the S&P 500 lose 50% of its value and called their money man to ask, “Hey, I’m doing okay, right?”
Um…no.
I guess what I’m saying is that giving money to unregulated investment professionals is like giving a Ferrari to these guys. I’m all for the free market, and whatnot, but perhaps maybe just a little government oversight? Maybe? You think?
[Disclaimer: I don’t know what the hell I’m talking about. Take all of the above with a grain of salt the size of my head.]
