Tuesday, April 01, 2008

Michelle Caruso-Cabrera's Sound Thoughts On Our Financial System

Michelle Caruso-Cabrera, one of the brightest on-air personalities on CNBC, and one of perhaps only two with a business or economics degree, had some choice words yesterday afternoon about the US financial markets.

As Steve Liesman whined about market failure, and Dennis Kneale made some fairly forgettable remarks, She conveyed eloquently in just two minutes several complex but important sentiments.

Among the salient points Caruso-Cabrera made in her brief comment were:

-Our financial system is all about risk and innovation, not control.

-Unless it's prohibited, you can do it.

-By contrast, in other countries, like France, if it's new, you must obtain explicit permission.

-Financial service firms will abuse leverage in every cycle. It is, she said, 'addictive- it's their cocaine.'

-So we have to expect some blow-ups in financial markets every few years.

-Regulation won't ever stop this, because we favor innovation and growth over control.


Could anyone capture the essences of US financial markets any better or more succinctly? I doubt it.

In the process of explaining these points, Ms. Caruso-Cabrera implicitly provided the rationale for why there will always be a tendency toward US financial market excesses. Innovation and risk taking lead to the marginal service provider taking the imprudent, marginal risk, in search of excess returns.

The key is not to smother innovation, but to attempt to provide sufficient safeguards, in the manner of clearing exchanges with collateral, margin and settlement rules, to make any one party's downfall less cataclysmic to the entire financial system.

And that is something Treasury Secretary Paulson clearly understands and is moving to do, per my post on his recently released blueprint for regulatory reform of the US financial service markets.

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