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Can a butter knife do a buzz-saw's work?

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March 24, 2010 – Comments (0) | RELATED TICKERS: AIG , GS , C

My article on Fool.com today finishes like this:

In the end, I don't see the Fed folks as a bunch of incompetent bumblers. But when it comes to smothering the next Lehman, Fannie Mae, or AIG, I do think they'll fail miserably because they're being given a butter knife to regulate with when what they need is a buzzsaw.

Theoretically, I believe the Fed could handle the task of regulating the banking system. The problem is that I just don't think we're giving the Fed the right tools. If Dodd's bill passes, we're more or less going to put systemic risk and too-big-to-fail on the Fed's shoulders and say "Don't let anything bad happen." Good luck with that.

The problem as I see it is that group-think is just too powerful. During the next bubble I just don't know that the Fed can unplug itself enough from the psychology of the markets to play a safe game of red-light, green-light. However, right now in the shadow of the financial criris, we have the opportunity to lay down concrete rules that won't require the Fed to try and decipher what's good and bad on the fly -- they'll have a rulebook to work from.

Sure, there's no way that we can lay down rules for everything that could possibly go wrong, but I think we can pick out a whole bunch of very important issues from the host of major failures / near-failures during the crisis. For the article above, I did some extensive reading of the Examiner's Report on the Lehman bankruptcy. If you haven't gotten a chance yet, I highly recommend checking it out -- it's very interesting and actually reads very well. Here's the link.

Of course, all that said, we're far from assured that the Dodd bill will pass in the first place. In which case, we'll be right back at square one with the big banks holding a cocked gun to our economy's head. "One false move and the economy here gets it, see?"

Matt

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