OldVet: Finding our Way out of the Fog

This one is by OldVet.

Attracted by the pretty lights we wandered into the financial winter and got lost in the fog. The photo is actually Odessa, Ukraine, and seemed apt this morning as we hear plans and counter-plans to deal with financial markets.

I’d like to draw your attention to a most interesting discussion on reforming our American capital markets. The author, Mr. Michael Lewitt, runs the oddly named Hegemony Capital Management LLC, and I have not read anything by him previously. However the discussion he provides is both provocative and salutary in the sense that he starts by trying to discover the root causes for our current financial market troubles. It’s worth reading just for the breadth of the discussion and the bold prescriptions for restructuring American capital markets.

Below are excerpts from the paper, which suggests a much more comprehensive tack than the Paulson plan.

For more than two decades, the United States economy has favored financial speculation over production. Over the past century, our legal system had developed an increasingly outmoded concept of fiduciary duty that privileges short-term, single-firm interests over the kind of long-term, society-wide interests that could lead to prolonged prosperity. The current meltdown in the financial markets is a symptom of a serious disease that is eating away at the stability of our most important institutions.

The Bush Administration, under the intellectual leadership of Treasury Secretary Henry Paulson, has proposed a broad reorganization of financial industry regulation. Unfortunately, this plan merely addresses form over substance and does little or nothing to address the underlying problems that are eating away at the system like a cancer. If reform ultimately follows the path proposed by Mr. Paulson and goes no farther to outlaw the reckless practices that place the system at risk in order to line the pockets of a privileged few, we will have sadly learned nothing from the current crisis. The system is infected by deep, inbred flaws that are rendering it increasingly unstable. Free-market capitalism as practiced on Wall Street and in The City has run amok. If the current crisis, and the recurring crises of the last twenty years, tell us anything, it is that market solutions are insufficient to protect the system from the greed and fear that drive markets. If the deep structural cracks in the system are not addressed and corrected, the markets may not survive the next near-death experience.

This one was by OldVet.