Is Wall Street Ready for the Middle Way?

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yin-yangOne of the core tenets of Eastern Philosophy is “The Middle Way.” The Middle Way is the path taken to avoid the two extremes (e.g., too much/too little, too liberal/too conservative, etc.). If we are too rigid, we break. If we are too soft, we wither.

In Wall Street’s case, lawmakers have been harming our society by swinging from Laissez-Faire to government intervention. However, a middle ground exists where capitalists can innovate, turn profits, and enhance society while the government simply defines a socially acceptable playing field.

For example, a few very simple rules would start us on the way to creating sustainable jobs and markets (Cf. boom-bust markets):

1) No lender can lever beyond a ratio scientifically proven to prevent a run on a bank or market collapse. I don’t know if the correct ratio is 7:1 or 10:1, but the Federal Reserve could easily learn the answer and make slight tweaks as the population and number of lenders change. This probably also means we need more lenders, not less.

2) Derivatives markets must be regulated by the SEC. We learned the hard way that derivatives affect all investors. Therefore, they must be regulated by the SEC. Further, as soon as a derivative becomes too disconnected from economic reality, it should be considered a threat to real investments. The perfect example is AIG’s credit default swaps which were not backed by any collateral.

3) All financial products must have economic legitimacy. If loans are made, borrowers must prove they can afford the loan. Thus, “no-doc” loans and manipulated paperwork must carry an incredibly hefty penalty (e.g., loss of lender’s license, fines for both parties, and possibly incarceration). We cannot pretend our system is great or worth using unless 1 + 1 = 2. Anything less and the system is a scam — no matter how “legal”.

4) No capitalist enterprise is too “anything” too fail. If a bank or company is too big too fail, the only failure was regulators allowing the company to become a threat to the entire system. We have anti-monopoly rules for a reason. The same logic applies to companies which would require taxpayer dollars in the event of a crisis.

In REAL capitalism, if your business cannot turn a profit, you lose and someone else will take your place. Either we are capitalists guided by common sense rules, or we are not. For a while, we have not been real capitalists. So long as certain companies and industries gain financial and political favor from politicians, we are not capitalists. This not only includes the “too big too fail” problem, but also issues such as oil companies creating political and financial barriers to entry for alternative energy entrepreneurs who will never be able to compete against a rigged market.

5) Certain aspects of human life must remain out of the economic sphere. Economics is a part of society — not the nature of the universe. As a democratic community, we must sanely and scientifically determine what economic activity causes more harm than benefit to our quality of life. This is a very complicated debate, but life isn’t easy. Again, we must find a healthy balance rather than become seduced by the extremes.

For example, in my opinion, a complete ban on smoking cigarettes crosses the boundaries of one’s liberty. However, an indoor ban seems like a fair compromise.

Also, we need to travel, so we obviously should not ban vehicles simply because they are major pollutors. However, we need to find a way to balance our need to travel with the need for our species to breathe clean air for possibly countless years to come. Again, we must avoid complete greed by car and oil companies while also steering clear of returning our society to horse and buggies.

Conclusion

Aiming for the Middle Way is challenging — especially in what has become a polarized society in the US. But in the end we all need job security and an economy in which young people can believe. Rather than let the pendulum swing from what was clearly too Laissez-Faire to what may become too interventionist, let’s get back to the middle ground where common sense resides. We are smart, we are entrepreneurial, we can do it.

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