No. of Recommendations: 12

Thank you for posting the link to my web site. That letter was the last in a series of four that I wrote on the subject of capitalism’s tendency toward instability. For anyone looking for a way to amuse (abuse?) themselves, here are links to the first three.

1. On Learning Things the Hard- way

2. Learning Things the Hard- way II – The shadow Banking System

3. Learning Things the Hard-way III – Credit Default Swaps

It is true that a good part of the content of these letters was posted here on the Berkshire board. I thought the subject might be of interest here because other than goofyhoofy (who has already objected to most of the content) I haven’t noticed many cross-posters here. Although some of the content may be out of date it is decidedly macro in nature.

The subject of deregulation has become an emotional one, and has become politicized so that one is expected to be for it or against it in Toto. This is unfortunate because it makes more it difficult for us to understand the issue, and for the country to pass legislation that works.

Roger Lowenstein in his book “The End of Wall Street” points to cases were deregulation has been successful, such as of the Airlines and Trucking industry were all the benefit has passed to the consumers in the form of lower rates and broader service options. For the companies (and their shareholders) that were present at deregulation there has been only grief and bankruptcy.

On the other hand Lowenstein points out (and I agree, with qualifications) that the financial industry is different because of its impact on the economy. There are examples were regulation has been helpful especially were the regulation seeks to increase transparency. In this regard the failure to require derivatives to be traded on regulated exchanges is a big mistake.

Federal deposit insurance has been very effective in preventing bank runs which were the scourge of the nineteenth century, but attempts to control leverage failed by the 1970’s because of trading of options, and then in 1980’s with invention all the other derivatives.
But the next time is not going to be different there are no laws that we can past that will end the bubbles and crashes. The best we should hope for is to cut back on the level of damage.
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