Simplicity, simplicity, simplicity

Could our financial problems have stemmed from too much complexity?

In banking, there are four or five ways to measure capital and about a dozen ways to classify assets. In insurance there is likewise a complex web of reserve calculations and investment silos. And everyone in finance is subject to an alphabet soup of regulators. Is the solution to our problem adding one more layer of calculation and regulation?

Having regulators compete with one another can be good on one level—it encourages each regime to do its best—but it can lead to regulatory capture, where the SEC lawyer is just punching his ticket before he moves on to become the compliance chief of a multi-billion dollar hedge fund. How quick might he be to shut down an offender?

Thoreau wrote, “Simplify, simplify. Our life is frittered away by detail.” A rational regulatory regime with clear simple rules—like a simple leverage ratio: assets over capital—might not be optimal, but it would be transparent. If the assets could be yours, they are yours, and count as leverage. A simple, uniform corporate tax rate brought in more revenue in Ireland per corporation than did a higher rate with more exemptions in Italy. That’s the power—and freedom—of simplicity.

In finance, there’s a lot of room to simplify. But it’s hard to get the balance right. As Einstein said, “Everything should be made as simple as possible, but no simpler.”

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-12T10:57:09+00:00 September 23rd, 2009|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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