'Cause I Said So…

The Democratization of Risk

Posted in Business, Capitalism, Finance, Government, Government Debt, Liberty, Morality, Politicians, Regulation by kevinsoberg on June 25, 2010

I was up at my regular time the other morning reading my news and blog sites, and doing a bit of tweeting. A tweet by Jonathan Hoenig (@JonathanHoenig) directed me to his then latest post, When in Doubt about a Stock, Stay Out (http://bit.ly/bYw1uN). He gives good, common sense advice on investing in the market. Thing is, it got me thinking, which is never good…

Was there ever a time when people dealt with the foreseeable negative results of their own actions, or inactions? It sure as Hell doesn’t seem to be the way of the world, anymore. People no longer seem willing to be at fault for anything they do or for the decisions they make. As a case in point, let’s look at the financial markets…

Over the last couple of decades, greater numbers of people have entered the markets. Now, this is of great benefit to us all. We need the middles classes to be an investor class. The markets are helped by an increase in capital available to corporations allowing them to more cheaply tap needed resources. Additionally, this lessens the burden to employers and to government, which have historically been on the hook for providing retirement income to seniors.

Unfortunately, two things have happened to negate the benefits of this expansion of the investor class. The first is the way business and investment news is reported. The second is increased government involvement in the markets. Both have had their own deleterious effects on the markets and on “investors”.

In the old days of the thirty-minute network news program, most people received their financial information in a fifteen second blurb reporting on the ups or downs of the NYSE or on the movement of the Dow Jones Industrial Average. For more in-depth information, the average person would go to their local paper for a closing snapshot of the markets movement from the preceding day. If there was an unusually interesting day in the markets, there would be a few articles in the Business Section. The hard-core investor and the financial types could always go to the news stand for the Wall Street Journal or the Investors Business Daily, but these were specialty publications as far as most people were concerned.

This hands-off, multi-layered approach to financial reporting all ended in the late 1980’s. Introduced not only were the 24-hour cable news networks, but close on their heels came their siblings, the Business and Finance channels. With the advent of these networks, came the increased presence of financial reporters, personalities, and gurus. Financial reporting became more and more about chasing the new “hot” stock pick or about setting the new record high.

“Live from the floor” footage of the NYSE, the NASDAQ or the CBE told the riveting tales of the daily ups and downs of the markets. Personalities were trotted out to pinpoint the under-valuation or the unexpected movements of a particular company’s stock. IPO’s and LBO’s were the order of the day. The markets were going gangbusters. Everything was going up and up… until it all went south.

No one saw it coming. Except they did. They just didn’t talk much about it. It didn’t fit the narrative they were telling or the product they were selling. “Irrational exuberance” was the order of the day. All of the danger signs were there, but few wanted to see them or at least admit it if they did.

I’m not just Monday (or more appropriately, Friday) morning quarterbacking this one. I cashed out of the market a year in advance of the crash. When I passed this advice on to others, I was called crazy. “You wouldn’t believe how much I made last month.” These were the same people who asked me why I didn’t warn them, after their stock holdings lost over half of its value.

In the wake of the busting of the “Tech Bubble”, yet more “reforms” were made to the U.S. financial system, as if that was what was needed. God forbid any one look at the decisions “investors” made during the “boom.” Weren’t there already regulations requiring disclosures to the SEC? Wasn’t insider trading already illegal? Didn’t each company have to prepare a carefully created prospectus for potential investors? No, there must be some grand conspiracy to defraud people of their hard-earned money. Really? Across the entire stock market?

How could that be? Wasn’t there already a virtual “alphabet soup” of financial regulators? Yeah, there was. Our financial markets have been heavily regulated since the Great Depression. There were no inherent problems or major gaps in regulation in the financial markets. In very few cases were there any findings of malfeasance or fraud on the part of corporate leaders. Yes, many people lost a lot of money, but, for the most part, only due to their own greed. That’s right, I said it.

“How dare you?” Yeah, I can hear it from here. I dare say it because it’s true. Greed IS NOT profiting from hard work or careful investing. Greed IS trying to get something for nothing. Those who chase financial market “bubbles” are not investors. They are gamblers. You want to bet your retirement or your kid’s college fund on a roll of the dice? Take it to the Indian Reservation. Stay out of the market.

“What about those poor Enron employees who lost everything?” Too bad. The first rule of investing is “diversify risk”. Risk diversification means NOT putting all of your eggs in one basket, which is exactly what they did. If you work for a company, that’s one big egg. If your company has a retirement plan, either defined benefit or defined contribution, that’s another big egg. Do you have: an Employee Stock Option Plan, a 401K, an IRA, other personal investments? Egg, egg, egg, egg. If you put all that money (and risk) in one place, guess what happens when there is a downturn? Exactly…

Instead of placing the blame for bad “investment” decisions squarely where it rests, which is on those responsible for their own portfolios, what do politicians do? Pander. Time after time, we have to hear the moaning on Capitol Hill about the “poor little guy” who was “snookered” out of his life’s savings. Who made him put all of his money in one “investment”? What’s next? Are we going down to the riverboats to feel pity for those who put all that they have on “Black”, “Red”, or “00”? Are we going to offer them a bailout or sue the casino? I call “Bullshit!”

I’m not just saying this about individuals. As far as I’m concerned this goes for companies, unions, governments… whatever. If you’re a corporate “leader” who signs an unrealistic labor contract, then you, your employees and your investors must deal with the consequences. If you’re a union “leader” who thinks he can bleed a business or industry dry, then don’t be surprised when it dies of anemia. If you’re a government “leader” who “kowtows” to public employees in hope of securing re-election, then you must make the hard decisions when economic difficulties arise and you have budgetary shortfalls.

For too long people have been trying to take the easy way to “success”, however they may define it. They have loaded up on risk in any number of ways. When the ax finally falls, as it most assuredly will, they go running for help. To whom do they run? Us, as always. They come running with their hands out asking to be made whole for the losses they have incurred. Why wouldn’t they? They have learned we’ll open up our wallets and paychecks for every sob story told.

Most of us were taught as children that we could only succeed if we made the right choices in life. We were taught to work hard, study, save, and spend wisely. Others have been taught to do the opposite, if not directly, then by example. Too many people (and they include businessmen & politicians, manager & workers, taxpayers & tax spenders) have learned that they can behave however they want regardless of risk, and the cost will be borne by everyone BUT themselves. They have learned that they can democratize risk, and we have allowed it.

The end result of decades of bad decision-making being paid for by innocent third parties is ever more bad decisions and ever more payouts. Where are we today? Public and private debt is at all-time record highs. The value of our total national government obligations is close to 90% of our GDP, our national income. We have hit a wall. It’s time for people to learn that if they fail because of bad choices, we won’t be there to catch them anymore. We just cannot afford it.

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