Friday, May 7, 2010

The problem of the Playbook vs Rulebook in today's markets

Whether bank or derivatives regulation, the type of bail-out of Greece, or the amount of taxes faced, one of the key themes in today's markets is that the rulebook keep changing.

There is a difference between the playbook and the rulebook for any game. If the rules are not well known, then a playbook cannot be created and after awhile there will be those who will just not play the game. We may be at this point in many markets. Granted some rules have to be changed. There can always be improvements to make a game fairer and easier to play for all involved. More bank regulation is needed. The rules for action concerning systemic risk have to be articulated. "Too big to fail" needs to be clarified.

This rule problem is one of the strong reasons why money is staying on the sidelines. Investors have a playbook for one set of rules, but the playbook has to be adjusted if the rules adjust. In the uncertain period between rules changes, the best behavior may be to do nothing.


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