Along The Road from Ruin 1

Returning to recommendations in The Road from Ruin, and matching them with this week’s financial reform package before Congress:

Dealing with “irrational exuberance”, “feedback loops”, the “greater fool theory”, and other contradictions to the theory of market efficiency requires a behavioral approach, says author Matthew Bishop. He calls for carefully defining the financial choices people have to make. Consumer protection rules written into the new legislation are along these lines.

Making sure stockholders are both well-informed and able to influence corporate decisionmaking is another of Bishop’s recommendations, as is educating the general public on the importance of financial literacy: “The inadequacy of shareholder rights in practice is matched by the lack of interest of most shareholders in exercising them…It is the silent majority of shareholders that has failed to hold management to account – insofar as the system allows it.”

The Business Roundtable issued a statement Wednesday against some of the financial reform mandates, one of which would allow for greater shareholder influence: “In addition, among the many corporate governance provisions, none of which are related to the financial crisis, the disruptive proxy access provision will stifle American companies’ ability to focus on long-term growth.”

Bishop named several problems with the current statement of U.S. financial markets: “short-termism” “IBGYBG” (I’ll be gone, you’ll be gone) “cognitive dissonance” and the lack of contrarian voices (his concern about one-sided media coverage of booms and busts is understandable, but he has no specific recommendations on how to improve the quality and dissemination of important financial information).

According to Bloomberg’s Wednesday update, passage of the financial reform package will be delayed until at least mid-July.

Sunroom Desk will conclude The Road from Ruin review after the Independence Day weekend (and July 5 holiday), with the book’s special call for an exercise of American exceptionalism.

Final installment: America must lead – conclusion to The Road from Ruin.