Saturday, February 16, 2008
Incentives Count-For Bankers Too?
"Yet of one thing we can be sure: unless we learn from this crisis, another one will put the world economy back on to the rocks in the not too distant future. ... The big question, indeed, is whether the lesson must be embedded in regulation. Optimistic opponents of regulation argue that the banks have learned their lesson and will behave more responsibily in the future. Pessimistic opponents fear that legislators might create a Sarbanes-Oxley squared. The Act passed by the US Congress in 2002, after Enron and other scandals, was bad enough, they say. The banks might now suffer something worse. ... Two points shine out about the financial system over the past three decades: its ability to generate crises, and the mismatch between public risk and private reward. ... [T]he banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilites seem to be contingent claims on the state. ... In addition, banking institutions suffer from massive agency problems. ... In the end, we are left with a dilemma. ... A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run", my emphasis, Martin Wolf (MW) at http://www.ft.com/, 5 February 2008.
On 6 February 2008 Yves Smith mentioned MW's article favorably at http://www.nakedcapitalism.blogspot.com/. See also my 13 January 2008 post. I agree with MW's observations but believe no, I repeat no, regulatory changes will make any difference. Either the regulators will prove too incompetent to "cage" the banks, or will make things worse like our current Goldman Sachs (GS)-run Treasury, which turned Abraham Lincoln's 1863 Gettysburg Address upside-down. As Sean Oleander remarked, we live in a world of "upside-down communism". MW argues our "financial sector ... is ... politically unacceptable in the long run". Amen. That's revolutionary talk. The US today reminds me of 1780's France as described in Crane Brinton's Anatomy of Revolution, 1965. I would be surprised not to see tremendous changes to our financial system in the next ten years.