A lot of people are wondering if there is anything at all good that will come from the financial crisis.
Call me naïve if you like or even an eternal optimist, but I think so beginning with the following:
A regulatory overhaul leading to pro-active regulation: Much of our legal structure in the west is based on hundreds of years of English common law. That means new regulation is typically moved forward only after something has happened or as a function of something that's not contemplated by existing regulation.
With regard to the financial markets, I believe that's going to change and that we will see new pro-active mechanisms designed to monitor problems before they get out of control. Some of that will include more transparent valuations and mark to market rules, but the lion's share will likely focus on the credit extension problems that have largely created this mess on a variety of levels.
What's more, history suggests these changes will stand in stark contrast to Alan Greenspan's repeated refusals to crack down on sub-prime lending practices and his hesitation to impose regulations on derivatives that have figured so prominently in the current meltdown. Whether this happens on Bernanke's watch or not, I don't know. He may not be the right guy for the job.
A dramatic shift with regard to how firms understand and quantify risk. Beginning with accountability. A critical first step will be an overhaul of the incestuous and highly conflicted ratings agencies that have been in bed with Wall Street for years. There will, of course, be resistance from both Wall Street and the ratings agencies themselves, but the need for more objectively rated instruments could hardly be more clear than right now. Nor could the need to have the value and quality of financial instruments be determined by the ultimate valuation mechanism – open markets.
Greed and avarice will be replaced by thrift and integrity. Just like it's been in the past at other points in our history, saving will become an honorable concept again. And that will become an important part of the recovery process if for no other reason than history shows until you have credit going up instead of down, you can't have growth.
Risk aversion will rule for a long time. People, and indeed entire industries, have learned their lessons the hard way this time around. That suggests that dividends and income paid by companies engaged in real products with real cash flow will once again resume their rightful place among the most important investments people can make.
In closing, there are obviously lots of other changes that will occur, too. Without a doubt many of them will be in areas we haven't yet tackled or aren't yet thinking about.
Which is also good news for as my dad put it yesterday so succinctly, "the financial crisis is like an extremely low tide. Until the water runs out, you can't see how much crap needs to be cleaned out of the harbor."