Why the Volatility?

When asked about the Financial Reform Legislation being enacted and if we will have another financial crisis in the future Richard W. Fisher, president of the Federal Reserve Bank of Dallas responded: "The answer is yes, because capitalism is inherently unstable and that's the nature of financial and economic history".

Now I have worked on Wall Street for over 30 years and have certainly profited by it, but I do wonder what kind of a structure we have erected. 125 years ago in his book "Looking Backwards" Edward Bellamy wrote that the trouble with capitalism is it creates waste in 4 major areas damning mankind to misery. They were "mistaken undertakings; competition and mutual hostility from those engaged within the same industry; the waste of periodic gluts and crises, with the consequent interruptions of industry; and lastly the waste of idle capital and labour at all times". He also mentioned that the use of credit is like building a house with dynamite for mortar. That very same credit that Niall Ferguson proclaims is the basis for the growth of our financial system.

Of course Bellamy was a socialist and none of the socialist experiments have proven to be successful, and certainly not enticing. It is interesting that in the 20th Century all of the "ism's" were given a shot on a grand scale. We had Communism in Russia, Fascism/Totalitarianism in Germany and Fascism in Italy and Spain, Communism in China, American Capitalism in much of the Western World with the exception of Europe's Market Socialism.

American Capitalism and Market Socialism appear to be the current winners. And yet by our own admission they are inherently unstable. All the regulation in the world won't stop the next crisis. Indeed, it might be sowing the seeds for an even greater blow-up. The fact is that no one really knows what the market is going to do beyond an (un)educated guess.

That's why I think fraud is so prevalent. As long as you don't get caught it almost guarantees success. Reminds me of the cartoon of a boy telling his father that he is considering a career in organised crime to which his father replys, "Government or Private Sector".