Will Wall Street Reform Renew Confidence in Financial Markets?

One must stop and ask a simple question. Will the recently signed Wall Street Reform legislation regulating the financial markets stop the tail from wagging the dog? We so often forget that what really drives the markets is confidence, or the lack of it. We currently have a Crisis of Confidence in our financial markets. We are now skittish, like a dog that has been struck and is now hand shy. We wince at every little blip in the markets. What will the Fed do with interest rates? What will the latest unemployment numbers be? What are the new numbers for consumer confidence? How many new housing starts have there been last month? The list goes on.

What we lack today is confidence. And since we do not have confidence at the moment we may be better served by viewing the recent legislative actions as positive steps in the recovery process and simply decide to "fake it until we make it!" A return to stability is the first step towards recovery. Maybe we should all collectively just take the 1'ST step from a 12 Step Recovery Program and just admit that we are powerless over the economy and that our lives have become unmanageable! Become stable. Stop doing what hurts first, and then start doing the things that help second. Get back to basics. Re-focus. Take a deep breath and calm down. Let some clarity seep into our lives. Just say No to knee-jerk reactions. Let cooler heads prevail. Let's use the litany of things that allow us to stabilize and just stop spiraling off in every direction as if we were still stuck in the vortex of the tornado.

It is difficult to have a return to stability when we have such a contentious political environment. Bi-partisanship is needed much more for the healing aspect of the appearance of our leaders working together to solve problems. It gives us hope. All the bickering does is continue to sap the constructive energies out of us as we have to fight to try just to maintain order. In watching a commercial the other day, I was struck by the clarity of the stated objectives of the company. The company was taking about the difference between invention and innovation. As important as invention is, innovation is 10 times more useful as it takes the seed of invention and turns it into practical purpose. We don't need invention for recovery at this point, we need innovation.

Much has been written about the negative impact to the economy and to consumer confidence as a result of the financial market meltdown. What I haven't heard much about is why we need to return back to the basics. Basics like there are no "Too Big to Fail" scenarios. Accepted concepts related to risk premium assessments have highly correlated relationships - by assuming higher levels of risk, you can expect higher rates of return due to the application of risk premiums. Diversification should be undertaken to limit the total level of risk assumed so you don't go bust if the investments turn sour. Greed directed people to risky investments under the promise of higher and higher returns while they casually forgot about the risky nature of the investments. It is not our job to protect professional money managers from their own greed. The rule of the harvest, you reap what you sow. You are NOT too big to fail anymore.

Anyone can pick apart the current legislation saying this is bad for this and that is bad for that. These exercises are counter-productive if the net benefit of the entire package is positive. These nuances can be massaged at a later date as part of innovation. The strength of this bill is it forces us back to the basics. A life of subordinated debentures and derivatives is not what interests the meat and potatoes members of Main Street. We need to put the financial gurus in lock-down for a while so we can regain our confidence in them. Let the punishment fit the crime. The cruel and unusual punishment was what they made the rest of us suffer through because they couldn't control their own greed. I would suggest that they start factoring "the greed element" into their risk premium assessments from now on since there is no such thing as Too Big to Fail anymore! We will start to add ignorance and arrogance into our calculations for our risk premiums as it relates to our confidence in the financial industries abilities to perform their function. We need to watch our greed factor as well and stop expecting 10-15-30% returns on our mutual funds. The problem with the American Dream is that we all envision ourselves being rich someday and collectively make our own bad decisions accordingly based on this dream. Confidence will return as soon as we all get back to reality and in particular back to the basics.