Wednesday, May 5, 2010

Real Finance Reform

If you want to know what real finance reform would look like, take a look at James Grant's recent Washington Post (WPO) editorial - The best financial reform? Let the bankers fail.

Jim Grant is the editor of Grant's Interest Rate Observer, a wonderfully insightful newsletter. He's also the author of many financial books, including my favorite: Mr. Market Miscalculates: The Bubble Years and Beyond. Proving his range of interests and talent, Mr. Grant has even produced a great biography of our second President, called John Adams: Party of One.

If you don't have the time or inclination for books, the short editorial is a must read. It begins:
The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits.
My favorite paragraph (with added emphasis):
The substitution of collective responsibility for individual responsibility is the fatal story line of modern American finance. Bank shareholders used to bear the cost of failure, even as they enjoyed the fruits of success. If the bank in which shareholders invested went broke, a court-appointed receiver dunned them for money with which to compensate the depositors, among other creditors. This system was in place for 75 years, until the Federal Deposit Insurance Corp. pushed it aside in the early 1930s. One can imagine just how welcome was a receiver's demand for a check from a shareholder who by then ardently wished that he or she had never heard of the bank in which it was his or her misfortune to invest.
Jim Grant calls on Congress to "restore real capitalism"... "let the bankers savor the sweets of their success"... and "pay dearly for their failures". If only...

My Grant's subscription is well worth the price, but this editorial is free!

Disclosure: Long WPO.

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