Friday, March 27, 2009

"New Industries" Regulated

Thrashing their way out of the mess.

The federal government has announced intentions to regulate money market accounts, hedge funds, insurance agencies, and "industries too big to be allowed to fail".

Do you know what these things are?

A money market account is a mutual fund which keeps all of its assets in the "cash" market. They were created back in the 70's as a tool to avoid Jimmy Carter's inflation, which ran just about 20% per year. Money market accounts have become combined checking/savings accounts with banks that are not federally regulated or insured.

Once upon a time there were state regulated banks and savings and loans which were not federally regulated either. During the Reagan era they were all swept away. Some dissolved because of the savings and loan scandal and some became federally regulated banks.

The problem we have had is federally regulated banks pay such poor returns and charge such outrageous fees that people of common sense have avoided them. Instead they have put their cash into money market accounts. Last October, there was a run on the money market institutions as people tried to convert their accounts into real currency when the system tried to sieze up. The money market trust funds were not properly capitalized so some simply shut their doors.

That's what the governmnet wants to regulate about them. That is, money market accounts are about to be converted into federally regulated and insured bank accounts.

What about hedge funds?

Do you know what a hedge fund is? No one else does either.

At its ultimate analysis, a hedge fund is a brokerage account where you turn over all the investment decisions about the account to the broker. Except with hedge funds, the broker doesn't always have to be a licensed broker.

Bernie Madoff ran a hedge fund and used it to destroy $60 billion in investments.

Problem is, nobody is in charge of monitoring hedge funds. An ordinary broker directed account or a mutual fund is monitored by half a dozen agencies and organizations. Your money is pretty safe with them. (I admit there are abuses, but the SEC does a good job of finding the abuses and reversing their effects.)

But hedge funds represented a way to get around the regulators. All I can say is it's about time for them to be regulated by someone!

Insurance companies?

Three letters AIG.

You can also throw in hurricanes Katrina and Andrew. When those disasters struck, some insurance companies simply pulled up stakes from the affected areas and replied, "Sue me," to their policy holders.

Up till now, insurance companies have been regulated by state governments. Court decisions and electronic capital have made our old system worthless.

We need a national regulation of insurance corporations, and of "self insured" corporations and individuals. But we don't want to lose the best benefits we have now.

Federal regulation of the insurance industry should incorporate the best and most agressive state rule for insurance into whatever is proposed at the national level. We'll have to watch this.

Finally, "Too Big to Fail"

GM is too big to fail. Apparently so is Chrysler and so is Ford.

If a company is so big that it's failure will annihilate America, then that company must be regulated and changed.

I think any company that is so big its failure would devastate the USA should be broken up into smaller companies.

This is good for everyone. Do you remember the antitrust regulations of Teddy Roosevelt's era?

This is socialism!

No, it's not. Look back over the 20th century's ideologies and you will find this set of policies was not codified as socialism, but as fascism.

Yes, Mussolini was the first leader to practice these policies systematically.

To succeed, we must regulate carefully, fairly, and well so that all Americans benfit and are not threatened by our system of regulation.

No comments: