Scenario: You've been saving for five years with the intention of buying your dream home, and since you're conservative with money, you're sitting on an old school LARGE down payment of $60,000 cash. All parties are ready, the moving plans are made, and your old house is already sold. You wake up on transaction day and head to the bank to procure your cash. When you arrive you're stunned to see the doors locked, with a note stating that they have ceased operations effective immediately. You are given a contact number for the FDIC.
In a panic move, you try the ATM machine for some walking around money… it's turned off.
This has just ruined your entire week, potentially your month. Since you now have to proceed through bureaucratic hoops in order to secure your own cash (the cash that belongs to you, after all), the entire home process is off, pending a resolution. You call the moving company to cancel, then the purchasers of your current home with the hope that you can stall for a while.
We all have a reasonable expectation that we can access our own money whenever we need it. Most of us take this for granted on a daily basis. We swipe the card and it works. Every time.
Since we all should know by now that this cavalier approach is misguided, I will float a new question:
Should the access to our money on a daily, even hourly, basis be as regulated as the power that flows into our house? Should we be stripping as much uncertainty out of the process as possible, even if it means over-regulating?
A prominent writer (and pioneer of derivatives) believes we now have no choice.
On Wednesday's Charlie Rose, Nassim Taleb, author of the acclaimed The Black Swan, proposed the idea that we are entering the era of "Capitalism2." After the failure of the highly speculative and over-leveraged "Original Capitalism," we are being forced by the current economic collapse to adapt a new way of looking at banking in America.
In Taleb's words:
It will be very different. Number one, banks will be utility companies, because we no longer will tolerate privatizing the gains and socializing the losses anymore. If you and I are going to bear the losses of bankers, we don't want to pay them bonuses for five or six or seven years, and then bail them out. Banks are going to converge with utility companies, because if you go to Detroit or LA you want to be able to get cash from a cash machine. It's a utility.
As I read it, Taleb's idea is that large banks, by accepting massive Federal financial help as a backstop to failure in 2008, are essentially marrying themselves to heavy government involvement and regulation in 2009 and beyond. They are accepting that bargain on its face, and as a result will be viewed by the public as a protected industry, much like the electric or natural gas companies. Banks are trading future risk and big profit for the right to continue to exist. As public utilities.
Since Americans (and this applies elsewhere in our interconnected global economy) expect to have access to cash and checking accounts in the same way they expect the light bulb to go on when they hit the switch, they will demand that these institutions be prevented from failure. They want the lights to stay on. The cost for banks? Competition and profit.
As Taleb points out, there will still be risk-taking. Banks will simply no longer be allowed to operate primarily as "sophisticated" investment vehicles. They will return to their old school job of charging fees for deposits and service.
The risk takers — upside investors (read: business starters and venture capitalists) — will still be around, but with the implicit knowledge that they WILL NOT be bailed out.
He continues, "People will be able to take risks, under the condition that society will not bail us out. You will have less debt investment, and more symmetry."
By symmetry Taleb is referring to risks that afford a balanced share of upside and downside. Meaning, those who wish to take greater risks will be forced to put more on the line on the downside. This is in contrast, he believes, with the recent era of unbalanced risk — some people taking much of the debt with little upside vs. those that risk little but stand to gain at a much higher clip if successful.
Is "Capitalism2" – where my bank is as bland as my natural gas provider – our only path after the economic lessons of 2008?