Way back when I was in my early teens, I was taught that freedom can only exist within a framework of rules. Without rules, freedom would run amok and result in more harm than good. Clearly defined rules and good enforcement help build trust in a system and ensure that it is functioning properly for the benefit of all.
As an analogy, anyone with a valid driver’s license may drive a car provided that he or she is prepared to respect all traffic signs and rules posted. If the rules are not obeyed, there would be total chaos on the streets and innocent pedestrians and other drivers would be at risk of harm and injury. Traffic rules are built on logic (reaction times, road conditions, etc.) – they are not there to impede progress but to keep order so that everyone can get to their destination safely in due time.
The notion of absolute freedom cannot exist in any society because the good of the larger community must prevail. The driver’s right is not prejudiced by the traffic rules – he/she is free to drive so long as the rules that applies to everyone is followed.
Why am I writing about freedom and rules? Quite simply, in the light of the financial debacles we have recently witnessed, it is clear that the degree of freedom that was accorded to the financial industry led to abuses and ultimately a crash that hurt many innocents and retirement egg-nests’ values were destroyed or, in the worst of cases, completely wiped out. In the light of what has happened, it is clear that we need a fresh look at how to prevent similar crashes in the future and we need to write smarter rules.
For far too long, we have relied too heavily on the word of the law and not the spirit of what was intended by those laws. This trend stems from the fact that it is easier to apply a prescribed set of do’s and do not’s than to leave it to the interpretation of the authorities. The problem with that thinking is that as new processes and technology is adopted, hard coded rules must be revised to keep up and we end up with volumes and tomes of legal prescriptions that no lay man can hope to fully grasp or understand anymore. At the same time, the ‘pros’ exploit the gaps in the rule books to profit from the unwary and uninformed.
The recent meltdown of what were once giants in financial institutions and insurers, the investment fraud perpetrated by Madoff point clearly to the need for a more comprehensive and intelligent way of ensuring compliance and reliability of the system.
Post Enron, Tyco, and WorldCom, the Sarbanes-Oxley Act of 2002 imposed more stringent rules and yet failed to prevent the current crop of failures and disasters. Clearly, this point to a lack of enforcement and, even more alarming, the lack of understanding or knowledge necessary for a proper examination of the underlying risks in the newly minted derivative financial instruments, even in the reputable credit rating agencies. If they claim to have the necessary competence, then it raises questions on their independence and ability to voice their concerns, given the fact that they are paid by the very organizations and transactions that they are rating.
The question before us then is: Do we need more intelligent rules to govern financial reporting, trading in securities and derivative instruments OR, more importantly, do we need better enforcement of those rules?
Prior administrations have increasingly weakened the enforcement arm of the SEC by defunding and deregulating the financial industry on the basis that regulations impede business and profits as well as the ability of the US exchanges to compete internationally. That is hogwash and serves only to promote the false notion that the market will regulate itself. The problem with that self-regulation notion is that it fails to take into account the human factor we know as ‘greed’.
The consequence of the latest round of financial fiasco was a near total collapse in faith and trust in the system worldwide by all players, including the banks themselves – demonstrated by the sudden credit freeze when banks feared to lend to other banks. Had it not been for the massive intervention by the government here in the US and in the UK and elsewhere, things could have been worse. The problems seen in Iceland and Ireland could have been spread across the globe faster than the latest strain of the flu virus and caused more devastation in its wake.
I’m not advocating that businesses or profits are bad – far from it. Businesses exist for a profit motive and I strongly believe in industry and reward. However, businesses should not dictate its own rules and business lobbyists should not have such a strong hold on the government that it can. Capitalism should not mean freedom for the strong to prey on the weak nor for the present generation to pass the mess on to future generations. We have a responsibility as good citizens to ensure that the soul and strength of the nation is not destroyed by the greed of the few.
