Irrational times

http://finance.yahoo.com/expert/article/yourlife/71740

I really like this quote:
Also bear in mind that, as Warren Buffett says, markets are at first a voting machine, but always eventually become a weighing machine.

That makes the point succinctly that I have tried to make several times! As much as we try to finesse, massage, tweak, and "fix" the symptoms of the financial world, there is some underlying reality that exists. With systems as complex as financial markets, that underlying reality is very hard to infer. Luckily, there is a mechanism for inferring that reality and it is called price. As prices move, all market participants can learn with the best possible accuracy what the reality on the ground is. Like Warren Buffet says, the market becomes a weighing machine. I totally agree with that statement and that's why this quote troubles me:

Why doesn't Mr. Bernanke call in the big bankers and tell them he'll make sure none of them fails? Why not tell them the Fed will always be there to bail them out and recapitalize them if need be? Why not stop solvency-risk fears today? Why wait until another day? Why wait until a million or 2 million more people lose their jobs or homes or both?

Well, unfortunately, all of those things are how the market signals the underlying reality. If there is a problem that needs to be fixed, people need to know what the problem is and how to fix it. If banks have overextended or residents have overspent on their homes, someone or something needs to let these people know. If people need to be more prudent in the risks they take, that information needs to be communicated to them. Unfortunately, sometimes the only way to communicate that message is to let businesses fail or people to go bankrupt. Otherwise, there has to be another mechanism to let people know that. Apparently Mr. Stein realizes this because he suggests:

Further, why not tell the banks that a condition for recapitalizing them is much stricter regulation about lending policies -- not lending against bad collateral, not lending to borrowers with no credit history? Why not also impose rules about executive compensation to keep top brass from looting their own stockholders even as they kill their own companies?
Regulation to the Rescue
It's a myth that all regulation is bad. In banking, regulation saves greedy, foolish people from killing their own banks and the economy in general. Let's save the banks, save the economy, and lay the foundation for a smarter tomorrow -- starting today.

So, that's fine. Some people think that the best way to run markets is to let them efficiently run themselves. When there are prudent opportunities to invest, the price will indicate that. When there are problems that need to be corrected, the price will again indicate that. Obviously, with this method financial hardships will occasionally occur. The other method is to prevent any pain by bailing out people or businesses that make mistakes but then to prevent them from making bad mistakes in the future, we get the smartest people in the country to figure out rules to force people to make the right decisions. Now both are valid models but, I've always felt that the reason the U.S. is the U.S. and Russia is Russia is because we followed model 1 and Russia followed model 2. Now there are always people that think that the planned economy people always just did it wrong and with even smarter people and even better planning we can make a planned economy work even better than a free-market economy. Apparently Mr. Stein is in the latter camp.