There was an important meeting of finance executives in Los Angeles last week. The topic of discussion was primarily on the new Dodd-Frank regulations set to come in effect in the US this year. During the conference, Mr. Griffin made a remark that struck me as... well... odd.
“The governments guarantee should be limited to very narrow risk taking activities. High quality consumer loans, high quality mortgages, high quality corporate loans. We should keep those parts of our financial systems walled off from that part of our financial system that revolves around aggressive risk taking.”
How can this possibly be a solution? The entire financial system (in fact our entire free market system) is based on rewards for taking risks. What exactly is a 'high quality corporate loan'? Is it one that is given to AIG or Lehman Brothers because the markets are soaring and the perceived risk is non-existent?
The reality is that bail outs are and will always be inevitable. Just because regulators tell us that there will be no bail-outs will not eliminate our instinctive nature to take ever greater risks during times of economic growth. The cycle of boom and bust simply cannot be stopped.
What we need is to instill into corporate management, a sense (some may even go as far as calling it 'fear') of accountability and consequence of legal/criminal corporate actions. This may have more of an effect than trying to put together a confusing set or regulations.
I completely agree. As long as people have no personal risk involved, they'll take unreasonable risks. We need more accountability and consequence - not prevention of risk taking.
Posted by: Candyce Edelen | August 15, 2011 at 04:20 AM