Smart People Seeking Dumb Money

There was a great headline in the NYT "Smart People Seeking Dumb Money" referring to the IPO's of private equity groups in the past year (all have lost money since their initial day price run-ups).  The headline is broader than the story.  This is an old, old Wall Street game.  It has some very familiar and repeatable themes; only the names of the securities sold change.  First, smart people sell something novel, new trendy -- with a promise of high returns-- and take fees [Goldman underwriting SIVs].  The fees go into solid investments (treasuries).  The recent new, new thing was CDOs and/or ABSs.  Second, some smart people get caught in the returns and themselves take equity, hoping to sell to greater fools (the greater fool theory) [Merrill Lynch; not Goldman].  If they get out fast enough they win; if they get in too late or hold too long they lose.  And third, the really smart people sell short the very thing they are pushing [Goldman].  The whole thing explodes and those who still hold the equity in the security lose big.  Government investigates, castigates and over-regulates.  It is a very old game. For our government, perched on a capitalist economy,  the issue has always been how much to protect the dumb money.  Too much protection and we get too little financial risk-taking and innovation.  Too little protection and we get too little investment capital.  The tendency of government is to overprotect -- with each crisis comes more federalism, more promises to protect, more efforts to appear concerned and empathetic.  Only the threat of new competitive economies elsewhere keeps government honest and even then we often get unhelpful subsidies and other forms of protection rather than structural reform than makes us more competitive.  What always amazes me is that we find enough common sense in this repetitive process to stay competitive at all.