Quote, May 15 2012 — If there’s no consequences for making mistakes, why try harder?

‘The answer to stupidity is not the moral hazard of bailouts, it is the educational lesson of failure. You screw up, you take more care next time. If you’re bailed out, you just don’t care.’

– John Aziz, azizonomics, “Can Banking Regulation Prevent Stupidity?”, May 13 2012 (site access May 15 2012 for this post)

Found via Zero Hedge.

More from the article:

Anyone who worked in finance in the decade before Glass-Steagall was repealed knows that prior to Gramm-Leach-Bliley the megabanks just took their hyper-leveraged activities offshore (primarily to London where no such regulations existed). . . .
. . .
I fear that the only answer to the dastardly combination of hyper-risk and huge bailouts is to let the junkies eat dirt the next time the system comes crashing down. You can’t keep bailing out hyper-fragile systems and expect them to just fix themselves. The answer to stupidity is not the moral hazard of bailouts, it is the educational lesson of failure. You screw up, you take more care next time. If you’re bailed out, you just don’t care. Corzine affirms it; Iksil affrims it; Adoboli affirms it. And there will be more names.”

It’s a very good article. Please go read it.

If you are not familiar with what Glass-Steagall is, it was one of the main banking laws in the U.S. between the 1930s and the 1990s. A lot of financial writers and observers are recommending its re-adoption because it separated banks where people deposited their money from banks who underwrote various financial instruments or speculated in financial instruments.

There are a few banks today who are deemed “Too Big To Fail” (“TBTF”) and so must be bailed out when they get into trouble because it will cause too much chaos in the U.S. financial system if they go bankrupt. But these banks both speculate financially and also hold customer deposits. So if the bank is allowed to go out of business, that’s a big hit to the FDIC and a lot of furious citizens (and voters) who just saw their bank accounts get wiped out. But because they have to get bailed out, if they speculate financially & their speculations go badly, there’s no real consequences.

So politicians and pundits propose various new rules and regulations, and everyone who’s looked into the history of how this mess got so big today knows it’s impossible to write the rules in such a way that somebody can’t find a way to argue or obfuscate their way around them.

Which brings us back to a consequence that can’t be argued or obfuscated: you screw up, you go bankrupt. Nobody bails you out.

How to do enforce that if you’re worried about politicians bailing out a bank that has a lot of customer (voter) deposits? Well, that brings us back to Glass-Steagall. Either you speculate in financial markets, and everyone who deposits money with you knows that’s what you do; or you take regular banking deposits and you don’t speculate in financial markets. That’s it, no gray areas, no protestations of ignorance (real or otherwise) from either you or your customers.

On a side note, the text of Glass-Steagall is both readable and understandable almost 80 years after it was written.  I’ve looked up the most recent financial bill, the Dodd-Frank bill, and even though it’s only a few years old, it’s a mess at over 800 pages.

I personally think there should be a law about writing laws: if you can’t write out your law in 100 pages or less, then you need to rethink it, simplify it, or break it up into pieces. But that’s a rant for a different day.

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