Simple Money

Is our financial system too complex?

Photo: Ben Thai. Source: Pixabay

In banking, there are four or five ways to measure capital and over a dozen ways to classify assets. In insurance there’s a complex web of reserve calculations and investment silos. And everyone in finance is subject to an alphabet soup of regulators: the SEC, FDIC, OCC, FINRA, FinCen, CFPB, NAIC, NFA, CFTC, and the list goes on. Will we improve our financial system by adding another layer of calculation and regulation?

Having regulators compete with each other can be good on one level. It encourages each agency to do its best. But it can lead to regulatory capture, where an SEC lawyer might just be punching a ticket before changing jobs to become the compliance chief of a billion-dollar hedge fund. How likely is that SEC lawyer to come down hard on the hedge fund? How often does the junior cop just give a warning to the mayor’s kids?

Thoreau writes, “Simplify, simplify. Our life is frittered away by detail.” A rational regulatory regime with clear simple rules, like simple ratios, might not be perfect, but it would be clear. If the assets are controlled by you, they belong to you, and also belong on your balance sheet. A simple, uniform corporate tax rate brought in more revenue in Ireland per corporation than does a higher rate with more exemptions in Italy. That’s the idea behind tax reform here.

In finance, there’s a lot of room to simplify. But it’s hard to get the balance right. If you get too simple, you miss the nuances. Newtonian physics is simpler than relativity, but it doesn’t work in many situations. As Einstein said, “Everything should be made as simple as possible, but no simpler.”

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-09-19T05:31:54-04:00September 19th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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