

Warren Buffett on what went wrong with Lehman and Merrill (2003) - byrneseyeview
http://www.forbes.com/2003/05/09/cx_aw_0509derivatives.html

======
patrocles
Companies and technologies come and go; this year's derivatives are
yesteryear's junk bonds.

It's not the technology, but rather a failed system of incentives that leaves
mis-managed firms to die from exposure.

~~~
nazgulnarsil
a failed system of incentives isn't just responsible for this, it's
responsible for most of societies avoidable ills. if we would just own up to
the reality of many situations and start providing proper incentives we could
engineer away many problems.

what incentive does a cop have to stop crime when he makes more money and is
safer busting stop sign violators? what incentive does an elected official
have to work for the good of his constituents when he will be out of office
soon? what incentive do parents have to raise decent children when retirement
is socialized and the government baby sits for them? what incentive do
businesses have to compete fairly if the government offers easy outs and
chances at monopolization (telcos).

~~~
anamax
> what incentive does an elected official have to work for the good of his
> constituents when he will be out of office soon?

Surely you're not suggesting longer terms.

Congress critters tend to stay in office a very long time.

~~~
byrneseyeview
It doesn't matter how long they stay in office, as long as they don't do
counterproductive things to stay in office. Most corporations have a "One
share, one vote" policy, so people tend to have a long tenure if they're good
at what they do. If corporations switched to the democratic "One man, one
vote" policy, you'd expect that, prior to any election, they'd just
redistribute some money from their big institutions to lots of individual
investors.

~~~
run4yourlives
How would you suggest democratic reform be completed then, votes depending on
income? Surely you can see how utterly disastrous that would be?

~~~
byrneseyeview
I think democracy is a disaster. Votes based on income would be silly -- what
about people who own lots of non income-producing assets, like timber,
minerals, early-stage companies, etc? Surely a system of votes based on wealth
would be smarter.

The governing business should operate like the cereal business, or the
software business, or the anything-but-government business: people pay a
reasonable price for a particular service, and get what they pay for. You'll
notice that a company like Google is somehow able to make its users happy,
even though it doesn't have monopoly power on multiple industries or the
ability to print arbitrary amounts of dollars, and yet the government is
_unprofitable_ even with these advantages.

Just tell me how you'd convince Larry and Sergei (and their shareholders) to
turn Google into a democracy, and I'll concede that perhaps democracy is a
sensible system after all.

~~~
nostrademons
Except that government, almost by definition, deals with goods that
necessarily involve lots of externalities, involve a public good, or require
transaction costs too great for any one entity to pay them. One person's
service is another person's annoyance.

Think about the highway system. Say that people paid a certain amount for the
privilege of driving on the roads. But then what about the folks whose land
was taken for the highway? How about the ones who now have to put up with the
noise of thousands of automobiles? And then what about positive externalities
- the business owners who make more money because cars can get to their
businesses, but don't pay to use the roads themselves?

Or think about the legal system, including consumer protection agencies. What
happens if someone contracts for a service, and then never pays up? Maybe
enforcement of service contracts should itself be a service. But then what if
that service itself breaches its agreement? Who do you go to?

Democracy's a pretty shitty solution, but it exists for a reason. All the
alternatives seem to be worse.

~~~
byrneseyeview
_Except that government, almost by definition, deals with goods that
necessarily involve lots of externalities, involve a public good, or require
transaction costs too great for any one entity to pay them._

Interesting. Most of the big expenses my government pays seem to involve some
sort annuity scheme in which everyone is required to participate in the same
retirement plan, even though the plan doesn't have nearly enough capital to
handle its obligations. They also do health care, and they blow stuff up. It
seems to me that most of the externality-based arguments can be taken care of
with insurance and derivatives markets.

For example, if we decide it would be a Good Policy to make everyone eat an
apple a day, because it would increase life expectancies by one year on
average, we could just mandate that they all do it. But we could also make a
bet on the average life expectancy in the US, pay people to eat apples, and
pocket the cost differential. I'm not sure the transaction costs would be
lower, but 1) the incentive to lower costs would be there -- no bureaucrat DMV
ever got a seven-figure bonus for cutting costs, but plenty of bankers,
consultants, and private equity executives have, and 2) it would have lower
exit costs than our current democratic experiment.

 _But then what if that service itself breaches its agreement? Who do you go
to?_

David Friedman claims that they'd form little federations predicated on
adhering to certain standards. If one company didn't follow through, it would
have to renegotiate separate treaties with every other enforcement agency (and
would lose lots of goodwill).

 _Democracy's a pretty shitty solution, but it exists for a reason. All the
alternatives seem to be worse._

Yes, yes, and no. It would be pretty weird for Democracy to be exactly the
wrong way to run almost every human institution, even though almost every
human institution is run better than the average democracy.

------
kul
"Derivatives are financial weapons of mass destruction, carrying dangers that,
while now latent, are potentially lethal."

Prescient.

------
MaysonL
It's informative how badly wrong Greenspan was, compared to Buffett.

~~~
apstuff
One is dealing with his own money while the other is not.

~~~
j2d2
Another important point: One is much closer to anarcho-capitalism in
philosophy than the other.

 _edit: if you downmod me, please explain why. this is a great opportunity to
learn._

~~~
corentin
I suggest you explain your own comment in the first place. Who is closer to
anarcho-capitalism in philosophy? The former central banker or the guy who
wants to increase taxes?

------
yan
The intuition of the man is baffling.

