Sense on Cents

Did the world’s candlemakers openly rail against Thomas Edison and his development of the light bulb? I have to imagine those candlemakers weren’t all that happy at the time. Edison embodied the American spirit. Capitalism thrives on the entrepreneurial spirit. That spirit promotes competition and has propelled our economy, our country, and our world over the years.

Capitalism also thrives on honest, open, and fair markets. Major financial and economic scandals over the years have often centered on self-dealing, abuse of insider information, and some semblance of unfair trade. These practices often capture enormous profits for a period of time but ultimately they kill trade. Why? Profits are a function of increased productivity, increased margins, and increased market share. To the extent that questionable, if not unethical or illegal, business practices initially promote greater profitability at the expense of future business flows, the foundation of that business has serious flaws.

Welcome to the world of finance 2009. In one way, shape or form, we have seen increasingly abusive business practices coarse through our markets and economy over the last few decades. From questionable asset securitizations to various forms of electronic trading, the practitioners have often reaped initial windfall profits while enacting real long term damage. How and why does this happen?

Highly intelligent people who are not properly regulated will drive profits to levels which are initially euphoric but if not properly monitored and managed are ultimately fatal. How so? When market participants feel that playing fields are not open, level, free, and fair, they will take their bat, ball, and capital and go play elsewhere. In so many words, the best and the brightest who implement trade strategies and computer programs are often simply ‘too smart for their own good.’ This scenario repeats itself regularly! (more…)