Matthew Yglesias » It’s Like a Hijacking

Nov 25th, 2008 at 10:08 am

It’s Like a Hijacking

I saw this guy (UPDATE: Dylan Ratigan) I recognized from CNBC on Morning Joe this morning making what struck me as sound points:

It seems to me that you don’t hear this kind of thing on CNBC very much.

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42

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42 Responses to “It’s Like a Hijacking”

bdbd Says:
November 25th, 2008 at 10:24 am
spot on. A great summation of moral hazard.

On a “let’s not toss the baby out with the bathwater” note, I recommend this speech (a transcript) by Ed Gramlich, former Fed governor who warned Greenspan early on that something was fishy in the financial system. Unfortunately, Gramlich passed away not long ago. The transcript looks at the current adventures from a broad boom and bust perspective, and points out that subprime mortgages do make financing available to millions who would have been ineligible in the past, and that most of those borrowers are paying their mortgages (although we’ll see if the broader economic conditions don’t take more of them down as well). I think this broader perspective should be more widely shared (but I don’t have a big important blog, Matt….)

http://kansascityfed.org/publicat/sympos/2007/pdf/Gramlich_0415.pdf
asl Says:
November 25th, 2008 at 10:26 am
The thought that compensation limits will discourage the talent necessary to run a bank is predicated on the myth that mysterious, super powers are necessary to run banks and major corporations.
makkale.blogcu.com Says:
November 25th, 2008 at 10:38 am
It seems to me that you don’t hear this kind of thing on CNBC very much.
http://www.makkale.blogcu.com
davisss13 Says:
November 25th, 2008 at 10:41 am
I hate it when someone makes a short statement then posts a video with -0- explanation. Not all of us have cable high speed.
JimboSlice Says:
November 25th, 2008 at 10:47 am
And that is why money party is on TV and Lord Yglesias is stuck writing a blog.

Seriously though, Dylan has been rather realistic and talking common sense throughout this whole situation.
MikeF Says:
November 25th, 2008 at 11:01 am
I agree that executive compensation is absurdly high, but the moral hazard case for banks is overstated. There is no historical precendent for a program like TARP, and there is little reason to believe that banks would have been helped in any circumstances except for a severe credit crisis. The problem wasn’t moral hazard, it was a systemic overconfidence in the housing market. The tools and models that were used and trusted throughout the industry failed. CEOs weren’t making decisions that were consciously over-risky. They, like everyone else (including regulators, possibly excluding Peter Schiff), had bad information about risk. Bad information poisons everything.
El Cid Says:
November 25th, 2008 at 11:06 am
Why on Earth do douchebags like Halperin (I believe that was Halperin) think that when they sympathize with this nonsense about how the bloated executive compensation is somehow related to personnel quality or executive performance, that the viewers are going to agree and not, in fact, see him as a tool douchebag?
James Gary Says:
November 25th, 2008 at 11:16 am
They, like everyone else…had bad information about risk. Bad information poisons everything.

Yeah, like all those French generals in 1939 who just had “bad information” about the effectiveness of the Maginot Line. Or all those reasonable Bush Admin types who had “systemic overconfidence” about commercial airliners being used in a terrorist attack. I guess we can’t blame them–it was their “tools and models…that failed.”

The problem is this: avoiding the kind of massive collapse that’s occurring now is supposed to be Job F*cking Number One for the banks–and they didn’t do it.
MikeF Says:
November 25th, 2008 at 11:41 am
James, I don’t think CEOs should escape blame. Leaders need to take responsibility for what happens under their watch, even if they were acting rationally. But my specific concern is that the anger towards CEOs is overwhelming the bigger problems. If the government takes the view that over-compensation and moral hazard created this crisis, we will end up with morally satisfying but ineffective reforms.
JimboSlice Says:
November 25th, 2008 at 11:48 am
Mike, it seems to me like you are admitting that CEO’s are not worth the $$ they are paid, because you admit that they were stupid and not corrupt, correct? So why not get the ball rolling towards limiting executive compensation, especially when it is the American taxpayers $$ going into these firms and then being diverted to executives pay?

That is based off your take on the situation, my take is a little more tin-foil hat type. I am of the belief that these executives manipulated the risk models and the systems to get big short term gains, because their compensation depends on pumping up the stock price, and pumping up the stock price is best done by wowing investors with huge immediate gains. So I think there should be an investigation made into wheter any of these CEO’s or other executives knowingly manipulated risk in order to boost their own pay. If that is the case then there needs to be examples set for future CEO’s and these guys need to join Ken Lay and Jeffery Skilling (I would prefer them to be more like Jeff)
Rich in PA Says:
November 25th, 2008 at 11:53 am
In the end what CEOs deserve is irrelevant–it’s what stakeholders want. The new stakeholder on the block is the taxpayer, and there’s overwhelming and incontrovertible evidence that the taxpayer wants CEOs to be punished. That ought to end the story, except that taxpayers are in some kind of uniquely pathetic situation where their stake doesn’t carry any say.
John Henry Says:
November 25th, 2008 at 12:06 pm
Well its more like a blackmailing. The real problem here is not moral hazard, but free-rider. The government wants deny that the financial system is a public good so that it does not have to pay for it via stringent regulation, but then claim its a public good when their is a disaster to justify the bailout.

These banks should not be allowed to get so big that they effectively own a major part of the American financial system. Non financial companies should be able to finance their projects regardless of which bank fails. This is a failure of the privatization push. They’ve let private companies take over a public good, relinquished oversight, and now that the private companies made a huge mess of things they admit that the economy is a public good again.
Steve LaBonne Says:
November 25th, 2008 at 12:16 pm
Banking used to be, and is supposed to be, a relatively simple business. What those huge salaries bought was executives much too clever (and greedy) for their own, or more exactly their banks’(since they did quite well for themeselves), good. Spending a lot less money for old-fashioned gray, bureaucratic, by-the-book bankers would have prevented the bubble from ever forming in the first place. So this is a case where the standard bullshit about “needing” to pay gargantuan compensation to attract the best and the brightest is even stupider than usual.
bdbd Says:
November 25th, 2008 at 12:28 pm
Being satisfied with status quo information to justify large investments, especially highly leveraged ones, is a form of risky behavior, especially when personal outcomes are distinct from investment outcomes. Moral hazard considerations apply here too.
Jimbo Says:
November 25th, 2008 at 1:24 pm
Steve LaBonne is right. Back in the early 70’s, we had no trouble financing almost 3m housing starts a year, mostly by highly regulated S&Ls run by people who couldn’t make it as used-car salesmen. A few years ago, the slice-and-dice quantum economists were patting themselves on the back for financing almost 2m (mostly fraudulently, as it turned out).

The financial industry is way too big, way too expensive, and is counterproductive to its intended purposes. It needs to be turned back into a boring business staffed by balding men in loud suits who make $100,000/yr, are on the golf course by 3 PM sharp and are filled with regret at what might have been.
James Gary Says:
November 25th, 2008 at 1:26 pm
[MikeF]: If the government takes the view that over-compensation and moral hazard created this crisis, we will end up with morally satisfying but ineffective reforms.

I agree. I want it all, though: morally satisfying AND effective.
Steve LaBonne Says:
November 25th, 2008 at 1:26 pm
Oh come on, DTM. The risks these guys took were orders of magnitude greater (and more poorly understood) than anything traditional bankers would touch with a 50-foot pole (or than they would have been allowed to by regulators before Rubin, Gramm et al. gutted the regulatory system). And to see proof of how completely unnecessary that was, you need only look around you at the many smaller regional banks that are in fine shape right now because they were satisfied with steady, reasonable profits rather than taking huge risks to chase the kind of profits that excite Wall Street high-flyers.
Jimbo Says:
November 25th, 2008 at 1:32 pm
DTM says,

“And market-based competitive pressures tend to motivate banks to go out to the edge.”

Yes – that is why they need to be regulated until their ears bleed. Time has proven that markets are an inadequate tool for disciplining banks. It should be a business where grey government drones continually crush the dreams of entrepreneurial innovators.
bdbd Says:
November 25th, 2008 at 1:37 pm
just a reminder — Jimbo is referring to what was called “3-6-3″ banking back in the day — borrow at 3, lend at 6 and hit the golf course at 3.

I think Steve LaBonne is largely correct about the “orders of magnitude” description of both the nature of the risk and the volumes. Note that for a big time banker, having one’s pants pulled down is politely referenced as “risks we didn’t fully understand.”
Steve LaBonne Says:
November 25th, 2008 at 1:48 pm
As Keynes said in another context (the stock market), “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
MikeF Says:
November 25th, 2008 at 2:00 pm
…they need to be regulated until their ears bleed. Time has proven that markets are an inadequate tool for disciplining banks. It should be a business where grey government drones continually crush the dreams of entrepreneurial innovators.

But if those entrepreneurial innovators are allowed to flourish overseas – in China, say, or Japan – then our money will flee to the land of the rising profits. And as we can see from Europe right now, even places with a strict regulatory regime are not immune to crises originating elsewhere.

Additionally, we have to be cautious that we don’t address the causes of the current crisis in a way that encourages future problems. Mark-to-market accounting seemed like a great way to protect markets against shady companies like Enron. And it worked, until it blew up in our faces.

So, I agree that we need some more regulation, but not an excessive amount. What we really need is smarter regulation – rooted in better transparency, less input from the banks into regulatory policies, and hopefully better analytical tools and models. Crushing innovation would be bad.
Steve LaBonne Says:
November 25th, 2008 at 2:10 pm
That’s a total non sequitur, MikeF. Thee used to be a highly useful distinction between BANKS, which were highly regulated precisely because of the moral hazard of government deposit insurance, and investment firms which could do almost anything that wasn’t actually fraudulent (and so were quite capable of competing for money looking for the highest possible return) but which did NOT have guarantees from the taxpayers precisely because they were empowered to take too much risk for such guarantees to be prudent. No good has come (to put it mildly) from mixing up these two kinds of entities and no harm will come (quite the contrary) from getting them properly sorted again.
Mike Says:
November 25th, 2008 at 4:10 pm
Dylan is pretty much Dylan all the time. He may not be quite that blunt on CNBC all the time, but when je gets wound up he is. His main job over there remains explicating the market per se on a daily basis, so the regulatory/structural analysis gets displaced a bit. But it’s Morning Joe’s style to draw people out of their typical niche and comment broadly and even speculatively, so we shouldn’t be surprised to hear this from Ratigan on MJ. If you watch enough CNBC, you’ll see him say the same things eventually.
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It’s Like a Hijacking

42 Responses to “It’s Like a Hijacking”

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