There is a great deal of speculation in the financial community about the impact of the impending Euro failure.
This is unfortunate. There is one cause and that is the failure of our government and our financial advisers to understand very simple advice I have been offering on this blog for three years.
The financial system is inherently volatile. Human genius will always create brilliant new financial instruments. Over a dozen have been created since 1980. Each of these new financial instruments will have perverse unexpected consequences and there will be an interaction of unexpected consequences over time. Nothing can be done to suppress this genius.
The most preposterous attempt is to have government regulation. Government regulators begin with the inherent incompetence of bureaucracy and the blindness of status quo.
The solution is to buffer the financial world from the commercial world. This is done by making sure that banks, the prime regulated entity, are not allowed to withdraw their loan funds from businesses unless the underlying assets have declined. I call this institution the Federal Loan Insurance Corporation.
Right now Wells Fargo is calling in lines of credit in Southern California because their asset base must be raised in the year 2012. Exactly the perverse consequence I am talking about. Wells will severely depress commercial activity in Southern California because of poor banking regulations and the absence of an FLIC.