Saturday, May 12, 2012

The Financial Fiasco is not a Market Problem

Good piece by Holman Jenkins in today's WSJ:

Obama+Frank+Dodd=Market uncertainty and incentives to get too big to fail by accumulating risky assets. How ironic!

Mark-to-market is a dysfunctional regulation that is based on the fiction that the value of durable assets are accurately assessed at any point in time by the "market." At the bottom of this is a profound misunderstanding of the fundamental nature of "value." The value of any (financial) asset at any point in time depends on what those who pay money to buy it think will happen in the future. It is NOT some mystical, objective number that the application of esoteric, rocket-science type formula will reveal. Finance is categorically different from physics. Value depends on what people think will happen, and different people think different things will happen (sometimes exactly opposite of each other). Regulators are not in some privileged position. They are, if anything, less likely to be right than the "expert" traders, who have both a greater incentive and more detailed knowledge and experience to get it right. But, even they, the experts, will be wrong - often - that is the way the market works. Sometimes they win, sometimes they and their clients lose. Regulation, by making the financial environment more uncertain, creates a greater disparity of outcomes and encourages irresponsible behavior by trying to shield us from failure. Too big to fail is just too big!

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