Page 21 - Investment Advisor July/August 2021

down the line — if not tomorrow — full-fledged global crisis. You have to of financial regulation on its head:
we’re going to wake up one morning and ask: Would we be better off without Normally we should spend the most
ATMs won’t be spitting out dollars, and the Fed or with it? We’re better off time thinking about predicting and try-
the markets will have disappeared. It with it. But the Fed has to draw some ing to avert financial crises. The regu-
shouldn’t be a surprise as to why we lines somewhere about how much it gets lators ought to be creating buffers for
got to this point. Technology can create integrated into the debate in the day-to- financial institutions to operate within
great quality of life, and it can also be day transition of money and movement so they don’t end up being in a crisis.
used to put the lights out. of the economy. But the way Congress has structured
the regulatory system, these days the
The U.S. government is “always ill- You say we need to find the right regulators spend the most time micro-
prepared” for a financial crisis, you type of government regulation, not managing institutions and the least time
say. What about all the economic and eliminate regulation. Please explain preparing for the next financial crisis.
financial problems that hit us in 2020? “the right type.” I’m not sure [could have done anything
In the history of the United States, no We need regulation because anytime to avoid dislocation in 2020], because
regulator has ever predicted and it was COVID-related. But every
prepared for a financial crisis. Of We can expect that at time we have a financial crisis, it’s
the last 10 financial crises since like the first time, and [usually]
1819, the government, and par- some point down the line … there’s nothing in place to deal
ticularly the Federal Reserve, was with it. The lucky part about 2020
most prepared for the 2020 crisis we’re going to wake up one is that it followed 2008 so quickly,
because they rolled out everything morning and ATMs won’t and many of the people and pro-
they did in 2008 to provide liquid- cesses were still there. So it didn’t
ity and pump cash into the system. be spitting out dollars, hit in the same way it would have
The problem is that you can’t if 20 years had passed.
keep pumping cash into the and the markets will have
system. You can’t keep putting Every financial crisis since 1819
assets on the Fed’s balance sheet disappeared. has been the result of “a collision
without having long-term conse- of six different elements,” you
quences. And that’s what we’re going to somebody is handling somebody else’s write. What are the salient ones?
have to deal with next. money, somebody had better be watch- Government policies that are left unat-
ing. [Also] regulation has to be smart. If tended. Another is market fermentation:
You argue that since the start of the not, it’s going to be counterproductive in We tend to make laws and regulations in
regulatory era, “ever-larger financial the marketplace. The way we focus on the financial area and leave them alone
panics” have occurred. Shouldn’t there regulation today isn’t smart. We’re not until we have a crisis. A rule or require-
have been fewer? regulating all the right institutions in the ment today has to be judged against the
The government has facilitated, caused right way at the right time. markets of tomorrow. If it’s no longer
or encouraged inadvertently much of There’s no reason why regulation relevant or working properly, it’s going
the private sector’s abuses — like corpo- can’t be on a real-time basis. The system to cause distortions in the marketplace.
rate fraud and unethical practices — that in use is backward-looking [after the
are [blamed for financial crises]. In 1913, fact]. There’s no reason why institu- Do you see a stock market bubble?
when the Federal Reserve was created, tions can’t report their numbers in an That’s always been a precursor to
[President Woodrow Wilson] and politi- automated way to financial regulators financial crises, you write.
cians were all saying that the Fed would by using artificial intelligence to run We’re creating an enormous bubble in
end financial crises in America — only to algorithms that analyze the institutions residential real estate and in the stock
have the Fed become part of the causa- daily and know where they’re going market. It’s a dynamic that will end
tion of the Great Depression of 1929. before they get there. up exploding. We’re building toward
That was followed by the [S&L] and assets losing value and credit evaporat-
banking crisis of the 1980s — only to be Should being prepared for financial crises ing. But it’s always hard to know what
followed by the subprime lending crisis be the main job of its regulatory system? the one thing is that will kick over the
that erupted in 2008, which became a This country has turned the pyramid can of confidence.

JULY/AUGUST 2021 INVESTMENT ADVISOR 19