FROM THE MOUTHS OF BABES

I'm fortunate in having a couple of pretty bright kids. It's a gene thing. The wife is pretty smart. Anyway, #2 son called the other day with an idea,; in fact he had a couple of pretty good idea. The first one is (and I'm pretty much quoting him here) is that the most effective regulation in the free market is self created. He went on to say that the most staunch rule of all is to avoid past mistakes. He then went on to more or less quote his old man who often told him that no banker ever made a bad loan (unless he was a crook) but most bankers have made loans that went bad...once...because one tends to learn from experience or one finds a new way to earn a living. I'm now going to quote him directly.

"Unfortunately, the market suffers from a short term memory because a premium is placed on youth while experience is often ushered out for new blood. This creates a largly academic environment where principals, formulae and algorithms are assumed and assigned predictable outcomes, ignoring factors such as human nature which can drastically change results. Mistakes are repeated because their rationale is always the same and because history has been ignored."

"We have created a smart workforce, not a wise one. While the academic qualifications of the workforce has increased, so has the rate of turnover in areas of critical production. The technicians are crunching the numbers with little to no real world experience, creating idealized data for decision makers with the result being flawed assumptions leading to disastrous consequences."

I sat and listened to him and read what he had written and realized that he was absolutely correct. The industry has no institutional memory. None. These guys have never met Mr. Murphy and there is no one around to tell them that he really exists. There is no one left standing in our largest institutions that can advise that a property bubble in Asia in 1987 is very little different from a housing bubble in the U.S in 2006 or for that matter a dot.com. bubble in the stock market in 1998. Worse yet, the manner in which we are attempting to correct and not repeat mistakes of the past is through regulations written by individuals who have even less memory, probably less intelligence and certainly less knowledge of the business than the practioners for who the regulations are being written. Plus ca change, and as Joe Nocera has recognized, it will happen again.

To really get one thing my son and I ask would you place your future in the hands of a lawyer or a doctor whose last contact with learning his or her profession was the day of graduation? Probably not. Which is why, despite having been admitted to the practice of law sometime last century no one will allow me to practice today because of the absence of continung education. I don't know what I shoud know, it's that simple.

In the past I have spoken of Banking in London at the time of the great international expansion of the 60ties and 70ties. A foreign institution coming to the UK was required to take on its staff a senior banker--the "Bank of England Man"--just to make sure that thngs were done properly...that is to say the manner in which the Bank wanted things done. It worked brilliantly. We need more than that. We need a mandatory program for the industry whose mission would be to create and maintain standards, privide a guideline of "best practices," review structures and provide various levels of managers with an institution history designed to avoid mistakes of the past. It is interesting to note that one of the best run businesses in the country--indeed in the world--the United States Military has just such a program. The Army War College and the Command and General Staff School are absolutely essential and mandatory to the advancement of senior officers. Other branches have the same and high on the list of objectives in every case is the avoidance of past mistakes. After what we have learned over the past two years is the financial industry any less important? I/we think not.

We're off to see #2 and the grandkids tomorrow but I'll have further ideas next week. Thoughts would be greatly appreciated. The Pack 27, Pitt 17. See you later