Why
Rescues Don't Work
Paul Tustain
BullionVault
April Fool's Day 2008
"...Just like natural
organisms, the financial system must have death to evolve into a better
form..."
NOW THAT HE'S wearing some sort of do-good government
hat, even Hank Paulson is not thinking straight.
Regulate in New York and finance goes to Toronto. Regulate in London,
it goes to Frankfurt or Paris – and since Toronto, Frankfurt and Paris
are run by the same nervous bureaucrat-types, we can reckon soon enough that the
entire financial markets will be hosted out of Singapore
and Shanghai.
There they will
accept the risks as well as the rewards, to their very considerable long-term
benefit.
You simply cannot
enjoy being the financial center of the world but start bleating for government
bailout whenever asset prices dip a few percent. As Paulson is demonstrating,
the regulatory price for being bailed out is far too high. We must all grow up
and take a full measure of punishment. The banks must take theirs.
Let the
shareholders and depositors take theirs too. Just like natural organisms the
financial system must have death to evolve into a better form.
Paulson's plan is
a dressed-up confiscation of the profits of the cautious, and a transfer of
those profits straight back to unreconstructed gamblers in the worst offending
banks. This is very unwise.
In these difficult
times, profit (or more accurately the avoidance of loss) should be benefiting
those who troubled to understand the risks in the system, and avoided them. But
Paulson's plan is currency creation, and a devaluation of the good quality
assets owned by the cautious. He fails to understand that unless the system
occasionally rewards caution there is no reason ever to be cautious again.
The market works
better without these rescues. Only by appropriate economic reward to the
cautious, when they are right and everyone else is wrong, will caution sit well
beside risk-taking in the financial system. The real threat to New York's and London's
continued dominance of the world's future financial system is government
regulation itself.
Mr. Paulson should
read Hayek's classic The Road to Serfdom,
and he would understand the inevitable failure of his rescue plans. He would
see how these top down rules remove society's flexibility until one day we all
wake up in a paralyzed "command" economy, where nothing can be done
without official sanction.
Instead, he has
forgotten what a command economy means. He should study the history of communism's
economic successes. It won't take him long.
Paul Tustain
Editor of www.Galmarley.com and
director of BullionVault,
Paul Tustain is a specialist in
computer systems for financial settlement, regulation and risk measurement.
(c) BullionVault 2008
Please Note: This article is to inform your thinking,
not lead it. Only you can decide the best place for your money, and any
decision you make will put your money at risk. Information or data included
here may have already been overtaken by events – and must be verified elsewhere
– should you choose to act on it.
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