If our economy were a casino

I haven’t written much on this blog since I got involved with the Obama for America campaign at the beginning of the year. Most of my posts have been over at MyBO (http://my.BarackObama.com) but now that the campaign is close to over, perhaps I will find more time to make the occasional post.

This morning, while discussing the unregulated hedge fund and credit-default swaps (CDS) markets, a conservative-leaning friend came up with the perfect analogy: The US government choosing not to regulate these industries is like a casino allowing any croupier to come in, set up a game and put the house at risk.

Any well-run casino is certain to manage the risk to “the house”; why didn’t our government feel compelled to do the same with “our economy?” As with the players in the finance industry who played the game, making bets without moral hazard, was there no moral hazard to our country’s leadership for failing to protect “our house”? Is that part of what this election is about? But after the election, then what?

Granted, like most people, I am still trying to figure out these complicated financial instruments and markets but when the total market for these swaps -- estimates range from 52 to 63 trillion dollars -- is roughly equal to the total world GDP for one year, I have to wonder, what kind of web have we woven? Shakespeare said a “a rose by any other name would smell as sweet”. To that I add, “insurance by any other name (e.g. a swap) is still insurance” and the necessary reserves should have been required.

I’m not a fan of heavy-handed regulation for I understand how onerous it can be and I would argue that we need to be careful not to let the pendulum swing too far in the other direction. However, allow me to revisit the issue of “insurance” but this time as an example.

I look at market regulation as similar to an insurance policy. Each month, paying insurance puts a drag on my disposable income but it remains a relatively small fraction in the broader scope of my total expenses. I am willing to pay that cost because I am not willing to suffer greater risk. Why didn’t our leaders look at our financial markets in the same way? Were they blinded by “Market Fundamentalism”?

As my blog is titled -- I’m “moderately inclined”.