0xC9: Lack of Regulation

It's funny because it's true, right? In addition, since we lack regulation, innocent institutions and individuals who invested in term asset backed securities and other loan facilities will suffer. Therefore, we must bail out AIG, as this news segment asserts:

http://abcnews.go.com/video/playerIndex?id=6993143

I would like to suggest that the above assertion is incorrect and that the problem was not that AIG and companies like it took advantage of poor regulations. There were sufficient regulation already in place to prevent fraud. The problem was that there was an excess of credit created by the Federal Reserve System.

So to complete the tainted meat analogy in the comic, imagine the government was in charge of producing the live cattle. They could produce as much or as little cattle as legislators decided. And let us also imagine the government produced as much cattle as possible because they believed our economy depended on it. There was so much cattle, meat packers had to come up with more creative ways to process and sell meat to the US population. If they didn't do something with the government provided cattle, the cattle would die before being processed.

That's silly, right? If the government knew its actions were inefficient, they would scale back their efforts, right? No, instead they berated the market for not producing meat as fast as the government produced cattle.

But the correct thing for the government to do would be to produce less cattle, not berate the free market. Don't breed them as much, don't force them on the meat packers. But instead, the government decides to increase cattle production even more due to the upcoming crisis they caused. More crisis, more cattle.

So the free market, faced with overwhelming supply of their commodity, decide to launch cattle into space, develop enormous cattle boats, or some other "innovative" solution. Eventually, they even figure out how to get the average person to buy cattle so each home has two or three heads of cattle. The president's advise when more crisis hits, "Go on a cattle drive." Eventually. the free market does things with the cattle no one would have ever dreamed of. They deal with the problem with innovation, which is what humans tend to do with problems.

It's a good analogy because at some point, one innovative solution might fall under an "unregulated" area. Then, this unregulated area might result in risk like a tainted food supply like the comic suggests. But the free market would not have tried this unregulated solution if it weren't for the ridiculously overwhelming supply of cattle. The problem was the government. The cattle market was just trying to deal with it.

In the real world, we have an overwhelming supply of something, but it's not cattle. It's credit. I'm not talking about credit cards, although that's pretty bad. I'm talking about credit created by the Federal Reserve System that floods the market.

The market had to take on the credit just like it had to take on the cattle. If they didn't take the credit, they risked being eliminated from the competition or prosecuted by the regulators. If you don't play the US currency game, you are dealt with.

So the credit market created all kinds of innovative solutions, including term asset backed securities and loan facilities to convert the credit into an investments.

It doesn't matter what it is. Cattle, credit, or jaguars, if you overproduce it, the market has to compensate with asset bubbles. The media is blaming the market for the bubbles when the government overproduced the commodity.

So what's the correct answer to the problem of AIG and such? Let them fail but blame the government's credit glut. But of course, the government won't allow it to fail because it means having to admit they caused the problem in the first place. They would rather take over AIG, making the US government the biggest issuer of insurance.

Welcome to the American Dream. We are all insurance brokers now.