Sunday, September 20, 2009

Survival Of The Unfittest?

"Greed is good," is the phrase that most comes to mind when thinking of the infamous villain Gordon Gekko in the movie Wall Street. I am not naive or crass enough to believe that greed is good, however Gekko did say another phrase that is much more relevant in today's world. He spoke about survival of the unfittest, and in recent history our nation's breakout of bailouts is creating a culture that is bringing to life Gekko's nightmare. Or at least that is the way an article within the Economist describes the culture, and not just in the US.

But the dramatic changes in the pecking order mask a lack of more profound change in the system of finance itself. Lehman aside, no big firms have been allowed to fail (as they would have done, unaided). Thanks to state aid, the law for big firms today is what Gordon Gekko, the red-blooded villain of the film “Wall Street”, dubbed “survival of the unfittest".

Don't jump to conclusions too quickly. The article is not a total advocation of complete free markets within the banking industry. The article makes some great points on why some government regulation is necessary, but warns of the dangers of setting a precedent of state guarantees.

Removing the explicit side of the state’s commitment is relatively simple. Some guarantees are still plainly needed now, but a firm deadline of, say, five years for the final expiry of the governments’ various crisis-induced pledges should be set globally. With the world economy in better shape, this looks more realistic than it did six months ago. But even then the implicit assumption will linger that banks will always be bailed out. This is the core problem. There are two possible responses to it: regulate banks to try to make them safer, and attempt to limit the implicit guarantee. Both approaches are now needed.

No one should pretend that banking is an industry where pure natural selection takes place. But as guarantees, both explicit and implicit, are withdrawn, the hope is that self-discipline will be imposed on banks, not just swathes of new regulation. There are signs that riskier banks are already paying more to finance themselves. This differentiation must be promoted, so the weak and reckless are gradually forced to shrink and live within their means—and not off taxpayers’ largesse.

I really like the article because it talks about some of the consequences of providing an 'implicit state guarantee' to the banks. The described guarantee is a fancy way of saying that we are starting down the slippery slope. I have blogged about the unforeseen consequences that can arise out of government deities deciding who lives and who dies, and this article illustrates some that are being to take shape. A good read from a good source of information.

1 comment:

Smitty said...

Love the Economist. I used this article with my senior Econ kids here in Venezuela today. I enjoy keeping up on your posts. Congrats on your non-profit. Quite amazing and inspiring!