If It’s Not Your Fault, Then How Come You’re So Rich?
One notion gaining in popularity among writers for publications likely to be read by members of the financial elite is that maybe this whole “finding out who’s responsible for this giant catastrophe” business is a mistake. Ross Douthat rounds up a few examples of this kind of thing from his colleagues Ta-Nehisi Coates and Megan McArdle and, indeed, Ross Douthat before plugging an article in the December Atlantic and then raising some doubts:
Henry Blodget makes a related argument in the just-out December issue of our magazine, arguing that “the interaction of human psychology with a market economy practically ensures that [bubbles] will form,” and that the mass pursuit of rational self-interest is the only real culprit for our present woes.
In one sense, I agree with these arguments, and indeed I’ve made similarly-themed arguments myself. But it’s also worth noting that saying “we’re all to blame” for what’s happened doesn’t exclude the possibility that some people, and some kinds of people, are more to blame than others – because some people have greater responsibilities than others, and all mistakes are not created equal.
Ross goes in one direction with this, but I’d like to go in another. It seems to me that we should largely concede that, yes, the failures here have to do with systems and human psychology and the nature of the world rather than the flaws of any particular individual. Replace Richard Fuld and Robert Rubin with two other people, and much the same stuff would have happened. But rather than militating in the direction of letting the financial executives off the hook and saying “massive harm, no foul” it seems to me that taking this lesson to heart should push us in the other direction. After all, the underlying premise of our finance-led rush to hyperinequality has been that the rich are very very very very different from you and me and that it’s so excruciatingly important that we maintain adequate incentives for them to ply their trade that we should ignore the immense damageimmense damage rising inequality does to middle class well-being.
One we realize that that’s not the case, that there’s no “magic” at work in the financial field and people are just mucking around I think that has quite radical implications. If nothing the CEOs and top fund managers are doing makes them worthy of taking the blame when the crash hits, then they also don’t deserve nearly the share of the credit — and money — that they got while things were going up.
73 Responses to “If It’s Not Your Fault, Then How Come You’re So Rich?”
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December 5th, 2008 at 11:17 am
If nothing the CEOs and top fund managers are doing makes them worthy of taking the blame when the crash hits, then they also don’t deserve nearly the share of the credit — and money — that they got while things were going up.
This is absolutely true. They were geniuses on the way up and somehow blameless on the way down. They shouldn’t be allowed to have it both ways.
On the other hand it looks more and more like Lloyd Blankfein and Jamie Dimon (and whoever heads up HSBC) are near-geniuses deserving of differential compensation. The problem was that there wasn’t a good way to differentiate them from Chuck Prince, Stan O’Neal, Dick Fuld, et al on the way up, so each could claim his equal reward. We really need to find a way to claw back some of those idiots’ earnings.
December 5th, 2008 at 11:20 am
Hey, am I crazy, or has Matt been making a lot of sense lately?
December 5th, 2008 at 11:22 am
Yes, thank you. Exactly.
December 5th, 2008 at 11:26 am
What freaks me out a little is that Matt seems to be capable of generating theses like this on a wide range of different topics, at the rate of, what, eight to ten a day?
Admitting that there are a certain number of misfires and typos, it still seems to me that the guy can’t be getting a lot of sleep. Or does he have a large staff of overworked interns?
December 5th, 2008 at 11:29 am
Didn’t Matt used to work for that same publication likely to be read by financial elites?
I don’t read Ta Nehisi’s post as absolving anybody of blame. It’s more about everyone taking a personal responsibility, IMO. Megan, of course, choose to interpret it as supporting her contention about there being no villain in the affair.
December 5th, 2008 at 11:31 am
We are ‘all’ to blame to the degree that we let the Supreme Court hand the Presidency to Bush Jr., and then more or less re-elected him in 2004. So, yeah, there’s that.
But usually blaming us ‘all’ for policy decisions taken by a tiny few is just a way of excusing the tiny few.
Likewise, arguments about how the market value of various business people show the deep brilliance of the market in finding the most talented people are clearly ideological arguments deployed for a purpose — to justify that system, not to empirically describe some objectively measurable reality.
December 5th, 2008 at 11:39 am
This is true but misses a lot. becuase (primarily) of misalligned incentives, there was a lot of behavior which, while not technically criminal, was by any reasonable incentive deeply immoral,and contributed greatly to the disaster. Plenty of people in the financial services industry knew or suspected that the mortage deriviatives were a house of cards likely to collapse at some point, but they created/sold them because they were, in essence, playing with other people’s money and didn’t face the downside risks of the collapse (or, to be more accurate, faced far fewer downside risks).
And let’s not even talk about the rating agencies.
December 5th, 2008 at 11:44 am
Which is to say that the stupidity defense – “nobody knew” – is bullshit on almost every level. It is analogous to the argument that the lack of WMD in Iraq is irrelevant becasue “everyone” believed that Iraq had WMD. Plenty of people knew what was coming (and acted on that knowledge, shorting the derivitives), and didn’t keep quite about it. Lots and lots of other people (at the very least) conciously and recklessly ignored a substantial risk of disaster, because it was in their interest to do so.
Put it another way, everyone (literally) knew that if the housing bubble popped wew would have a disaster of approximately the scope that we in fact have. The element of self delusion was that a lot of people falsely belived that the bubble wouldn’t pop. But no one deluded themselves that there was a zero chance of the housing bubble popping – they just choose to ignore the risk that it might.
December 5th, 2008 at 11:46 am
I can’t recall a single post about executive compensation from Matt in which he acknowledged competition as a relevant factor.
OK, DTM. Competition was a relevant factor. The desire to earn more money for one’s own bank (and a higher bonus for oneself) caused many financial managers to take unsafe risks.
Competition has been acknowledged. Now, what exactly is your point?
December 5th, 2008 at 12:02 pm
Well, if we’re going the “laissez faire” route then why not suspend the laws so that we can go and shoot the motherfuckers?
We KNOW the cause of this problem. Crooked Corrupt Republican Whores in Congress and the WHite HOuse (and yes, some Democrats as well ) enabling theft on a massive scale.
IF you let the assholes get away with it, they’ll keep doing it. You let George W Bush’s brother Neil skate after he buttfucked the taxpayers in the $Billion Silverado S&L crash. So how did that act of mercy work out?
Why is a significant percentage of black males in jail while the entire fucking Bush family walks around free as birds?
December 5th, 2008 at 12:05 pm
That some CEOs made bad bets and lost money is necessary to an explanation of the crisis, but not even close to sufficient. That’s always happening: some trader bet the wrong way on natural gas futures or some executive had a wrong hunch on the potential of [x] fuel cell technology or [y] cancer drug. The punishment is never enough if you personally lost your ass because of the bad decision, but it’s part of the ordinary operation market.
What’s happening now is not a case of a couple guys wrongfooting the market. It is, I’d suggest, the consequence of an intellectual failure of massive proportions amongst experts who evaluate credit risk. Or, alternatively, the consequence of an inappropriate systemic reliance on the relatively few, unaccountable experts who evaluate credit risk at rating agencies.
December 5th, 2008 at 12:16 pm
One notion gaining in popularity among writers for publications likely to be read by members of the financial elite is that maybe this whole “finding out who’s responsible for this giant catastrophe” business is a mistake.
My what a coincidence!
December 5th, 2008 at 12:16 pm
It is, I’d suggest, the consequence of an intellectual failure of massive proportions amongst experts who evaluate credit risk.
All the evidence I can gather suggests that to call it “intellectual failure” is to grant it an undeserved dignity. The “experts” seem to have been relying on their mathematical models to be 100% predictive—which in the case of something as complex as the securities market is just on its face moronic. (That noted, I’ve seen no convincing argument that the models the “experts” relied on weren’t total crap anyway.)
December 5th, 2008 at 12:16 pm
Southpaw,
Even that gives them way too much credit. Don Williams, despite his lack of analytical rigor, is basically correct. What basicly happened here is that the financial services community, either intentionally, knowingly, or, at very best, with a reckless disregard of known risks, sold trillions of dollars of wothless paper to stupid suckers, in order to earn commisions and other fees, and despite (again, knowingly or with reckless dispregard of a substantial risk) the fact that the eventual collapse of the house of cards would crater the economy.
Sure the buyers of this worthless paper didn’t undersatnd the risks. Nobody is blaming them for anything more than greed and stupidity. But the people that sold them the crap – that is a differentr matter.
And, yes, the financial services firms did also own a lot of this crap. But those firms (and this is a change from 20 years a go, and a big cause of the crisis) thos firms were not owned by the people who ran the firms, but by their shareholders.
Ask yourself WHY the credit rating agencies got things so wrong. If you spend a little time looking at the DETAILS of what happened, it will become quite clear that the ratings were SO out of whack, and so OBVIOUSLY out of whack, that the most charitable explanation is willful blindness.
December 5th, 2008 at 12:16 pm
Privatize the credit; socialize the blame.
December 5th, 2008 at 12:17 pm
Sure, DTM, competition played a role in the spiraling costs of executive competition. Once one of them gets a grossly inflated salary or an outrageous bonus, the others use it as leverage in their own salary negotiations, and before long any competent CEO candidate will turn down an offer with a modest salary because they know they can hold a little longer and get a ridiculous paycheck from someone else. It’s the same sort of wage spiral seen in professional sports.
But blaming it all on competition is a cop-out. CEOs are the upper echelon of business professionals and some of them undoubtedly have talents that are hard to find. Unlike ace pitchers, however, they do not have rare, statistically quantifiable gifts that justify spending millions of dollars to lure them away from rival companies. Pro athletes do not hold positions in other teams’ front offices and vote on each others’ benefit packages. Pro athletes can’t fudge their own statistics to raise the team’s share value and maximize their stock options. Pro athletes don’t generally award themselves multimillion dollar golden parachutes when they resign from a losing team.
There are systemic problems in our system of executive compensation that reward unnecessary risks, reward nepotism, reward creative accounting, reward tax evasion, reward failure, and pretty much reward corporate executives no matter what they do. Good, bad, innovative, dull, closely engaged, playing golf, honest, corrupt, whatever… once you get into the clique, the worst thing that can possibly happen to you involves taking a huge lump of severance pay back to your chateau in the Catskills and giving back the private jet.
Which is to say there really isn’t any productive competition at all. There are a lot of very talented people in corporate front offices who work very hard and deserve a bigger paycheck than I get. But the competition is being channeled in directions that benefit a handful of individuals at the expense of everyone else, and the performance incentives are thoroughly perverse.
December 5th, 2008 at 12:19 pm
“…the interaction of human psychology with a market economy practically ensures that [bubbles] will form…”
The same interaction, of course, also practically ensures that burglaries and muggings will be committed.
But I’m guessing the “bygones” crowd is less philosophical and sanguines about that.
December 5th, 2008 at 12:22 pm
See my 12:02 post, which I composed before seeing the question in your post.
I’m in complete 100% agreement with you that proper regulation is the key to avoiding crises of this nature.
A lot of what you’re describing in your 12:02 post—competitiveness and risk-taking—seem to me to just be “basic features of market capitalism,” though. If Matt and others aren’t addressing those points directly, it might be that they’re just assumed to be inherent in the system.
December 5th, 2008 at 12:35 pm
For what it’s worth, a lot of the argument on this thread is fundamentally missing Matt’s point.
He’s not offering an argument about how this crisis could have been averted. Nor is he saying that we ought to cap executive compensation.
He’s making a broader point, a point that’s fundamentally about the incoherence of conservative rhetoric re: inequality.
December 5th, 2008 at 12:54 pm
WHY isn’t ANYONE beating the living shit out of Senator Bennett and Congressman Saxby? THEY were the Chairmen of the COngress’s Joint Economic Oversight Committee — the PEOPLE MOST responsible for allowing this massive fuckup to happen.
But the stupid fucks in our goddamm worthless news media don’t have a damm clue. Goddamm corrupt whoring Judith Miller wannabees.
December 5th, 2008 at 12:57 pm
DTM — I started that comment before you addressed most of my objections. The lack of a preview feature here is obnoxious.
Ted is right. Matt’s point about the lack of accountability and the duplicity of the right-wing talking points on the subject rings true regardless of whether we delve into thornier questions of why the problem exists and how it can be mitigated. Neither Matt nor any of the bloggers he cites have any meaningful insight into the nuts and bolts of the financial system, least of all Megan McArdle, so it’s probably best that they stick to discussing the political ramifications of the matter.
December 5th, 2008 at 12:59 pm
I regularly join DTM in whacking MY on economic and especially business-related posts, but while I think that DTM’s substantive points above are correct, in particular the mis-application of the fund manager model to other industries (e.g., monkeys throwing darts really won’t help P&G’s new product policy or improve hedonic pricing models)I also think that MY’s original point (as noted by Ted #25) is exactly on target.
It truly is fatuous and deserving of enromous scorn, social approbation and physical punishment to claim that “it was my leadership” when things went well and “it was system” when things went in the tank. That isn’t to deny that “the system” — aka the institutions, institutional arrangements and norms in which these players operated — was partly responsible.
But when you are at the peak of one of these institutions, presumably you ought to be able to have some influence on institutional arrangements and norms. If you can’t affect that, then you’re just a pasenger not a captain of industry steering the boat or setting the course. And you deserve to be called out and punished like other frauds.
December 5th, 2008 at 1:05 pm
1) 100 Million Americans each drive an average of 15,000 miles per year — and an extremely small percentage have wrecks.
2) Airline pilots fly over a thousand flights per day every day for a year — and almost all of the planes land safely.
3) We sent men to the fucking moon — and steered them on their return to within a few miles of their recovery ships.
4) YEt we can’t supposedly can’t manage and regulate something so fucking simple as lending and borrowing money.
This is a goddamm lie — it’s an obvious goddamm lie — and the fucking assholes promoting it deserve to driven from the public forum for their two-faced deceit. If they’ve been in the business, they deserve to be sent to prison and stripped of every cent they have.
December 5th, 2008 at 1:08 pm
Re Gene’s comment “But when you are at the peak of one of these institutions, presumably you ought to be able to have some influence on institutional arrangements ”
——–
You’re not fucking kidding. LOOK at who donates a shitload of money to both parties.
The CEOS are basically saying “Our abject, sniveling whores in the US COngress didn’t restrain us the way they should have if they were looking out for the American people –as opposed to our personal interests.”
December 5th, 2008 at 1:09 pm
But blaming it all on competition is a cop-out. CEOs are the upper echelon of business professionals and some of them undoubtedly have talents that are hard to find. Unlike ace pitchers, however, they do not have rare, statistically quantifiable gifts that justify spending millions of dollars to lure them away from rival companies. Pro athletes do not hold positions in other teams’ front offices and vote on each others’ benefit packages. Pro athletes can’t fudge their own statistics to raise the team’s share value and maximize their stock options. Pro athletes don’t generally award themselves multimillion dollar golden parachutes when they resign from a losing team.
This is so well put I just had to quote it.
For executive compensation to be analogous to compensation of pro athletes, Stephon Marbury would have to be able to renegotiate his contract with himself (or other players) and alter his own stats on which his performance would be evaluated.
December 5th, 2008 at 1:12 pm
If nothing the CEOs and top fund managers are doing makes them worthy of taking the blame when the crash hits, then they also don’t deserve nearly the share of the credit — and money — that they got while things were going up.
Given that premise, how would you go about ensuring that they don’t get so much money? Really high tax levels as incomes rise (pushing into punitive 80-90% above certain exorbinant levels of compensation), or legal wage caps?
I think you’re correct, but I’m not sure how to go about implementing this from a regulatory standpoint. It used to be that it was just unseemly and shameful for an exec to make that much more than their workers–the robber barons made their billions because they owned their companies–but shame and social obligation seems to have gone out the window as a restriction on CEO/Hedgehog pay.
December 5th, 2008 at 1:15 pm
Neither Matt nor any of the bloggers he cites have any meaningful insight into the nuts and bolts of the financial system, least of all Megan McArdle, so it’s probably best that they stick to discussing the political ramifications of the matter.
Slightly OT: I generally endorse a policy of being silent on topics whereof one has no knowledge, but I’m tremendously skeptical of the claims of DeLong, Salmon et al. that the mathematical “nuts and bolts” here are anything other than a smokescreen for a good ol’ pyramid scheme.
With that in mind, I contend it’s impossible to discuss the “political” aspects of the crisis without also addressing the “economic” or “mathematical aspects.
December 5th, 2008 at 1:15 pm
Word to Ted’s #25. And weaker than Ted, but still true: if you look back to Matt’s post, he isn’t referring to CEOs in general, but executives strictly in the finance sector. Maybe that makes a difference to you, maybe it doesn’t.
My pithy rewording of Matt: “The buck stops where the bucks stopped.”
C’mon, you know you love it. It’s pithy! Who doesn’t like pith?
December 5th, 2008 at 1:17 pm
If there’s a tendency for people to behave in bubbly ways, there will always be those who look at this behavior and say “yum yum I’m gonna get me some of that bubble cash.” Which group “CEOs” fall in seems to be uncertain.
December 5th, 2008 at 1:21 pm
While The Atlantic article is well worth reading and persuasive, it actually has a bit of fundamental reasoning backward. It is arguing that we’re wrong to focus on substantive reforms such as regulation or antitrust measures, since capitalism is like that. But the fact that capitalism isn’t the marvel that free-market ideology claims is precisely what should give us pause.
December 5th, 2008 at 1:33 pm
DTM,
Matt’s point is that we are paying alpha salary for beta performance.
December 5th, 2008 at 1:41 pm
DTM- I’ll agree that you’re right that MY is painting with far too broad of a brush here, but MY is still absolutely right that executive compensation is way out of whack. And it is not the case that in the natural order of things this is impossible to avoid. Executive compensation in the Japan and Europe is far less than it is here in the United States, and it is not entirely clear to me why. There a some circumstantial arguments about CEOs controlling the purse string, conflicts of interests on boards, etc, but I think it would be worth investing some energy researching this problem and figuring out what kind of public policy mechanisms we can implement to deter this inflationary cycle chasing a limited number of slightly above average CEOs. That kind of income inequality is unhealthy for the republic and it is also unfair.
December 5th, 2008 at 1:45 pm
If they’ve been in the business, they deserve to be sent to prison and stripped of every cent they have.
#30. Don Williams Says: December 5th, 2008 at 1:05 pm
————————————————————-
“That (leverage) explains how a Washington political operative like Rahm Emanuel, now Obama’s chief of staff, who studied ballet rather than balance sheets, could earn a reported $16.2 million in two-and-a-half years at Wasserstein Perella, the mergers and acquisitions boutique. At the height of the bubble, Bruce Wasserstein’s firm sold out to Germany’s Dresdner Bank for the fairy-tale sum of $1.6 billion. Even the crumbs from Wasserstein’s loaf could make a Chicago politician rich.” Spengler, Asia Times, 11/24/08
Some guys are (Way!) more equal than…well, you know. Hey, maybe Rangel can get me some.
December 5th, 2008 at 1:55 pm
I don’t think this is right.
Take something like mortgage-backed securities, which have been around for decades, whose popularity was deliberately cultivated by the federal government, and which confer considerable benefits to both borrowers and lenders.
Then the financial crisis hits, people read about them for the first time, and suddenly they are just another example of a con job pulled by conniving millionaire Wall Street bankers.
Or take ideas like “the people pricing the risk used an inaccurate mathematical model” or “the people pricing the risk didn’t have the proper incentives to get it right.” Sure, but these issues didn’t suddenly arise in 2008. They’ve always been a part of finance.
December 5th, 2008 at 2:10 pm
DTM, okay so MY is not getting us going in the right direction here with his commentary which is really only relevant for financial executives if anyone, but he has never been reliable for generating original research anyways. I think it would be immensely helpful if someone could actually figure out the reason executive compensation in the United States has increased so much in the last 25 years. And that is a separate issue from finding mechanisms to improve real wage growth. Although, I think claiming executive compensation comes out of corporate profits while the rest of payroll doesn’t is basically false. Perhaps it is this view that is part of the problem. There is simply the top line and the bottom line. If boards are rewarding CEO’s for improving the bottom line (absent executive compensation) and then paying them enough to adversely impact the company’s real bottom line, then they certainly aren’t doing their jobs very well. After all, there isn’t any fundamental difference between giving the CEO lots of money and distributing that money amongst the rest of your workforce from a capital returns perspective.
December 5th, 2008 at 2:25 pm
Sure, but these issues didn’t suddenly arise in 2008. They’ve always been a part of finance.
You may be right–I’m no historian. For all I know, since the dawn of history investment bankers have been betting fifty times their available cash that groups of people who borrowed vastly more money than their income could support would be able to always make their interest payments. And for all I know, mathematical models have always existed that conclusively “proved” such “investments” were rock-solid.
December 5th, 2008 at 3:08 pm
Obviously finance is in the middle of a massive disaster. That’s not what I’m saying.
This ire at mathematical models is somewhat misplaced. You might get the idea that mathematical modelers are the most important people in financial companies, and everyone does exactly what they say because after all who can refuse the computer? But this is not correct. Generally speaking, no one really trusts a computer model unless it gives them the answer they want. For the most part, financial modelers are back-office monkeys who are ignored as much as possible.
Similarly, this shock at bankers betting much more than their available cash is also not quite right. Banks are leveraged; that’s what banks are. They have a certain amount of capital and loan out a substantially larger amount to generate profits.
I’m not saying the bankers didn’t fuck up; they obviously did. But generally speaking: banks are leveraged, bankers are greedy for profits, banks assess risk by relying on imperfect computer models, and salespeople and investors have very different incentives that often conflict. What I’m saying is that all this stuff is normal and rational, believe it or not.
On the other hand, this idea that “housing prices had no where to go but up”… you know, something tells me that people could start believing this without computer models.
December 5th, 2008 at 3:28 pm
1) It seems to me that all of you are being diverted by a red herring. IT is the past Republican Congresses and our current Republican President who failed here. It is they who failed to avert this calamity via oversight, legislature, regulation and prosecution. We can debate WHY that didn’t happen — criminal corruption or gross stupidity. Take your pick.
2) But the larger point is that it is our CURRENT DEMOCRATIC CONGRESS which is sticking us with the BILL for this malfeasance — and which is refusing to levy massive taxes on the Superrich who benefitted in order to make them pay for the mess. Plus there were lots of Congressional Democrats on the Oversight Committees who failed to raise the alarm.
3) The basic issue is that a few hundred plutocrats can spend a few $Million dollars to install deeply corrupt whores in both parties.
Those whores –backed by the COnstitution — can and are stealing $TRILLIONS from us for the sake of their rich masters and are putting us into long term economic slavery.
4) And there is NOTHING we can do to stop it so long as we abide by the rule of law. Throw the scoundrels out ? SO what — the rich will ensure only new scoundrels can win the primaries.
Meanwhile the old scroundrels like Phil Gramm wave merrily to their bankrupt constituents and stroll off to UBS sinecures and lavish retirements.
5) One third of us are too fucking stupid to realize what’s happening because they depend upon the lying News Media for information, another third is waiting for baby Jesus to bring on the Rapture, and the final third was wondering who’s going to win the next NFL game.
December 5th, 2008 at 3:39 pm
Re “Replace Richard Fuld and Robert Rubin with two other people, and much the same stuff would have happened.”
————-
This is bullshit.
Replace Robert Rubin with Brookley Born and this would not have happened.
Replace Bill Clinton will Bob Kerrey and this would not have happened.
Which is why our elites make damm sure they kill the political career of anyone who looks like he might be independent and inclined to serve the people rather than the elites.
It’s a filthy system — as totalitarian as anything in a South American dictatorship. Our systems , however, hasn’t crashed so far because it’s shielded by a mass of lies instilled by a $Trillion educational system devoted to producing fools — and a multi-billion News Media devoted to keeping the fools in their state of characteristic ignorance.
As George W said in 2000, there’s some people you can fool all the time — and those are the ones you want to focus on.
People thought he was joking.
December 5th, 2008 at 6:29 pm
Great. How about deploying a little sober, fair minded avoidance of the blame game towards helping ordinary, middle class homeowners who work outside New York city, instead of only helping millionaire bank executives from Wall Street.
December 5th, 2008 at 11:27 pm
This ire at mathematical models is somewhat misplaced…
Yes, I agree. In fact, I’m not in disagreement with anything in Barbar’s 3:08 post.
As I mentioned earlier in the thread, I’m venting at DeLong, Salmon et al. who are on a campaign to blame the entire crisis on defective mathematical models. I thought that was bulls**t last week—and as of 11:25 EST on Friday 05 Dec, I still do.
December 6th, 2008 at 12:20 am
I’m of two minds about this. The financial industry is all about allocating capital from savers to companies who will hopefully produce a return for the savers. It’s pretty damn tough to predict the future, so a lot of people are going to be wrong. At the same time, you need some sort of intermediaries to filter out the worst of the companies because most savers don’t want to do the filtering themselves. I’m not sure how much you can attribute everything to luck or lack of luck. If everyone started flipping coins when making investment decisions, I’d bet there would be some inefficiencies that even I could take advantage of.
As an aside, I wonder if the misallocations would have been even worse without our system where winners can make a lot of money. That is, to what extent did the short sellers prevent even more bad capital allocation?
I think that we need a system where people can make a lot of money doing the very difficult job of capital allocation. We just need to fix the agency problems that allow people like Rubin, CDS shortsellers at AIG, etc. from cashing in while things are good and not getting hurt when things turn south. Then Yglesias’ points lose a lot of force and people would still have a great incentive to get capital allocation right.
December 6th, 2008 at 10:18 am
Political systems and human psychology make it inevitable that violent bloody hateful regimes bent upon wiping out enemies both domestic and foreign will rise. That is why the Nuremberg trials were such a mistake. Sure, Dr Mengele made some mistakes but he was just playing his part in the inevitable march of history.
December 6th, 2008 at 11:17 pm
Wow rapier, that’s just a creepy thing to write.
“Or take ideas like “the people pricing the risk used an inaccurate mathematical model” or “the people pricing the risk didn’t have the proper incentives to get it right.” Sure, but these issues didn’t suddenly arise in 2008. They’ve always been a part of finance.”
But then again, financial institutions weren’t allowed to amass so much debt before 2004.
December 16th, 2008 at 5:18 pm
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