Money

Last night we discussed money, the root of all evil?

I was going to discuss greed and how it may be different from ambition. 

We talked a bit about altruism, balancing the priority of achieving personal independence versus helping others.

However, the discussion quickly moved to reactions to government bailouts of the economic crisis, how money no longer connects to producing what we need in life and consumerism that is leading to the rapid depletion of our resources.

Gerhardt mentioned that as a child, he had to help his father with farm work, how he could see food being produced and there was sense in work and money.  Later on, as he worked in the computer field and had share options, he saw his assets swing wildly with stock market valuations of his shares and his computer efforts no longer gave him the connectedness he had with his childhood farm work.

He called the financial problems two years ago as voodoo economics where everyone was chasing after some mathematical formula with no visible improvement to the benefit for the world.  Everyone was out there to try to take advantage of someone else until the whole system falls apart and the government was forced to bail out the financial system with everyone's money while the financial industry continue to distribute big bonuses.

Rafi acknowledged that with experience we can now see that the US financial system should have had more regulation.  However, the US system is still the most efficient system around.  This efficiency may need to be compromised with regulation to provide more stability or to reduce the disparity between the high and low income earners but these are all choices we have to make.

Both Shula and Rafi pointed out that mathematics represent reality and financial derivatives serve a real purpose in our economy.

Dan pointed out that we are all involved in this and we also need to recognize our part in this.  He used the example that when he buys insurance, he usually do not read the pages of fine print that goes with the insurance policy.  Strictly speaking,  it is his negligence for not doing so when he finds that he is not covered because of some of the conditions described in the fine print.

So when mortgages were given to people who obviously could not afford it but were counting on rising house prices to bail them out,  should the home buyer or the government that push for more home ownership have some responsibility?  We all blame the mortgage lenders for lending indiscriminately, but in a free society where we are all responsible for our decisions, do we have some responsibility for defaulting on something we cannot afford?

This is were it occurred to me on defining how much regulation we need for a free enterprise society.  Regulation is required where it is impractical for the participants to determine the risks involved in the agreement they make.

So we need to regulate banks and insurance companies because we do not want to have to make a full study of the financial health of these entities as to whether they can honor their obligations before we deposit our money with them or buy an insurance policy from them.  It is not practical for us to do "due diligence" on them and continue to do it while we have money deposited with them or an insurance policy from them.  That amount of care belongs to investing stock in these companies but not as a customer of these companies.

Commerce will grind to a halt if we have to do this kind of "due diligence" before using their services.  So even though we generally operate on a "buyer beware" free society, regulation is required to protect customers as well as to facilitate commerce.

More regulation offers more protection but also makes the regulated company all behave the same and stops them from doing innovative variations without additional risks as the nature of regulation is to not do anything that is different.

The combination of complexity that lull us into deferring our responsibility to others, the drive to more efficiency through less regulation, and the initial wild profits from an inflating housing bubble all contributed to us ending in a spot called the financial crisis.

Complexity is here to stay.  We better figure out how to handle it.