10.05.2008

THE RIGHT KIND OF ACCOUNTABILITY

Even the most ardent free-market defenders have to be backtracking from their positions in light of our current housing and financial crisis, right? Hey, I'm no libertarian, but we're treading on shaky ground here, and could end up doing more harm than good if we're not careful about the kind of accountability we're putting in place.

Let me start by saying I largely agree with the bailout measure. In fact, all hail King Hank Paulson, and why haven't we shuddered more at the thought of what would have happened if Bush hadn't successfully urged him to take the Treasury Secretary position and we instead had one of Paulson's recent predecessors at the helm? Hey, no one likes massive government intervention, least of all when it looks like it's going to bail out fat cats on Wall Street; but one never sets policy in a vacuum, and sometimes one has to do what's necessary to prevent even more harm from being done.

That being said, where exactly is more regulation warranted? Greenspan is being vilified for largely thinking that the financial markets can be self-regulating, but think about this for a second: if I sold crap sandwiches on the corner for five bucks each, I'd soon go out of business because no one would be willing to pay me five bucks for my product. Point being that the market is pretty darn good at allocating activity to where it best deserves to be allocated, based on global needs and wants, and changing on a dime as those needs and wants change.

Where there is some serious market failure, and therefore some possible justification for government oversight, is with the ratings agencies. They're the ones, after all, that are supposed to signal to the marketplace of buyers what exactly they're buying when they buy something; AAA for stuff that'll almost certainly pay back with interest, junk status for stuff that's riskier, and multiple tiers in between. Of course, they're paid by the very entities they're supposed to objectively rate, and therein lies the inconsistency: their real customer is the general public, in terms of protecting its interest by evaluating and commenting on an entity's risk profile, but they make their money from those very entities.

As portfolio after portfolio of complicated investment vehicles came by for a rating, agencies were either too lazy to get informed about what exactly was in these things, or too unwilling to stop the gravy train and bit the hand that was feeding them more and more business. Either way, all sorts of funky smelling meat was being branded "Grade A," and next thing you knew, the stuff was stinking up a whole lot of places you'd think would be too smart to have bought this.

The nature of the financial markets is that risk and return can't be decoupled. And, in my opinion, while everyone played a role, the ratings agencies were where a lot of that decoupling took place. It just goes to show you that the right kind of accountability can go a long way.

Let's be mindful of this as we try to unbury ourselves from this mess we've gotten ourselves into, as well as where we are in need of accountability in other areas of our personal, communal, and professional worlds. When the people and places that are supposed to mind the shop are asleep at the switch, bad things will eventually happen. And when we are those people and places, let's not fall asleep in the first place.
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