In the case of international finance, I think it's really cool how an institution can help another institution raise capital, move debt, and mitigate losses. Like any system that involves independent actors, banking can (and usually is) diseased by those who are able (both intellectually and financially) to game it for their own gain and to the detriment of the system as a whole.
Banking, it seems, is almost aware of how self-destructive it is. These entities take on complex risks that the smartest people in the world can barely understand and they hope that everything will "just work" or, when things don't work, they rely on their overall value to the system - we can't let banks fail.
Still, I don't think all bankers are socially worthless. They help to create confidence in the banking system and in finance in general. It's only the "bad" bankers that are worthless, and even then they are only worthless to those who stand to lose if they fail.
"Moral hazard is insidious. It lurks in people's minds and stealthily causes them to make ever riskier, and less principled, decisions. It also fosters Gresham's Dynamics. A Gresham's Dynamic describes an environment in which unethical behavior crowds out ethical behavior. For example, analysts in ratings agencies prior to the crisis had to decide whether they would inflate their ratings to please their customers. Those agencies were, and are, paid for their ratings by the financial institutions that are seeking to have their products rated as highly as possible. The result was that analysts that gave inflated AAA ratings were promoted. Analysts that refused to inflate, were fired. Gresham's Dynamics were omnipresent in the institutions that brought our economy crashing down.
Here is what we now face:
- The structural problems and Gresham's Dynamics in our political economy have been preserved and reinforced.
- The same people that drove us to the brink are still, for the most part, our decision makers.
- We have infused enormous moral hazard into all levels of our economy.
- The majority of politicians and regulators - regardless of party affiliation - are complicit.
Try buying a consumer-grade blender. It will break in under a year. You have to buy commercial grade (e.g. Vitamix) or don't bother. All the consumer-grade blenders on the market are junk.
Yeah, it's like house prices. Houses inflate to whatever people can afford. So when the price of houses goes out of reach of a lot of people (like here in the UK) the obvious solution is for the government to demand people get easier access to debt, and to start pumping public money into the housing market. Because that totally won't just inflate the prices further...
That way they can't be written off, but if you don't make much initially you're not saddled with paying a fixed amount.
0. Complexity allows bullshit to conceal the capture of additional money. Case in point: Enron.
1. Goldman Sachs is way too fucking connected. How else would the "non"-double jeopardy prosecution of Sergey Aleynikov and S. 3642 be even remotely possible?
I don't believe I observe that value in my daily life. Would there be sufficient confidence in finance without investment banking? Surely, there was confidence in finance long before the current generation of exotic derivatives? Surely, there was more confidence in the past, when people were able to relate to what was going on?
Even if the financial industry is apparently building value for now, it seems to be building value on top of a house of cards. And nobody is really sure that the base is stable.
We can argue that this creates value out of nothing, but I don't view that as a good thing - especially not now that a large percentage of the economy is dependent on the financial industry having a steady hand.
But we do get the benefit of the trickery - I can go buy shoes at a store because the employees are paid out of debt, rather than out of the store's profits (which are mostly reinvested into other capital that, hopefully, exceeds the debt). Without the debt, and the ability of the market to utilize it as a commodity, I wouldn't be able to participate in mass-market purchasing, and thus my $50 shoes would cost $200
The structure of a successful business would be essentially the same. Plus, the bank is already charging an amount which corresponds to the value provided.
Meanwhile, big banks also utilize many kinds of trading that aren’t in the service of their traditional clients. One is proprietary trading...There’s no social defense for this practice...
Implicit assumption: speculation is socially worthless.
“You mean to tell me your work as a [fill in the blank here] is worth more to society than a firefighter? An elementary school teacher?...”
Implicit assumption: pay is or should be proportional to gross utility rather than marginal utility.
Apart from this it's typical economist claptrap - thousands of words, no real point. Why is it here?
And a further assumption that jobs that are deemed "socially worthless" ought not to be done, or ought to be prohibited.
In which case professional poker is on the chopping block, or professional athletics is banned because it is deemed to have less "social value" than its compensation level.
Or that pay needs to be determined by some official, 'blessed', committee of professional economists who publish a list every year of salaries, based on how much social and economic value is provided by each field of work.
(Sounds kind of Soviet, actually.)
I'm not arguing for a centrally defined salary committee, but surely you have to wonder if there is a better way?
This has been well studied. The answer is that compensation is proportional to marginal productivity rather than mean productivity.
I.e., consider a very important profession, say superhero. Having one superhero to stop the Joker is worth $1M. Having two superheros is worth $1.1M - Batman is sufficient to stop the very dangerous Joker, but two superheros can stop both the Joker and the far less dangerous Harleyquinn. The marginal productivity of an extra superhero is $100k even if the mean productivity is $550k. As a result, superheros get paid $100k because if any superhero quits, society loses only $100k rather than $550k.
An extra banker produces a lot of value. An extra teacher produces very little. Hence, teacher pay is lower than banker pay.
(As a proponent of the signalling theory of education, I'd also argue that the value of a lot of education is actually negative.)
For some value of "value".
(Also, the example of two superheros isn't a good one - they will probably collude and get something much closer to their full value)
It's also the case that marginal arguments are very clear when the examples use small numbers. It has the side effect of making them sound silly. But I guess there are not 2 of very many real professions.
That seems to be the most reasonable argument for redistributive taxation - the idea that the >$1M earner can afford to part with some of his surplus to fund programs that benefit society in its entirety, and more specifically those whose jobs are not so richly compensated.
Of course, the devil is in the details and implementation.
For example, a lot of wealthy people are honestly or pretend to be libertarians. Libertarians don't seem to be very fond of the finical industry.
I wonder why this is?
So what you need to fix this? Of course, more rules and regulations. Because there's no problem with rules and regulations that can not be fixed by more rules and regulations.
Could you elaborate for a non-American, please?
There is a fantastic web series called the "Gervais Principle: The Office According to The Office.(1)" The central thesis is that organizations have three types of employees: Sociopaths at the top. Clueless in the middle. Losers on the bottom. The defining characteristic of the Sociopaths elite is 'the basic heads-I-win-tails-you-lose pattern behind all Sociopath machinations.'
Strangely, this fun piece changed how I look at moral hazard. Before, I thought of it mostly as an inevitable consequence of badly designed systems. Similar to employee reward schemes that employees learn to manipulate in a way that is detrimental to the business or cobra bounties intended to reduce the number of snakes in a city leading to backyard cobra farms. I thought it was less of a problem in emergent, evolved human systems. After reading this piece, I think of it differently. It's a human psychology thing. Human systems have assumptions about fair play built into them. Psychologically perverse human (sociopaths) can take advantage of these assumptions.
I knew a guy from Uni. He was doing a Research Masters, badly. He failed. Resubmitted. Appealed. Rewrote. Appealed, and eventually got a pass. He wasn't really smart enough and he never understood the subject. But, universities (especially graduate programs) don't really fail students. Students drop out, especially the ones who struggle. Persistence can substitute for smarts and he walked away with Masters from a top uni. I later learned that he got into the Uni in the fist place with some hack. He applied to a second tier uni, and used some clever clauses to transfer to the better one without having to go through the front door admissions process.
We then proceeded to hound every big name in the field for references. None of them wanted to read this pile of crap but again persistence can substitute for quality and he eventually got some nice references and quotes. He used these along with a professionally written resume and application letters ($450) to land a sought after graduate job. Big government body that takes at least 12 months to fire someone. Excellent entry into the world of public policy research. Before that happened, he had found a recruiter who specializes in these guys. He moves jobs every 6-12 months which means a recurring bounty for the recruiter and a raise for the sociopath. On getting a job they immediately started planning for the next one, like a heist. He was so confident. It took a remarkably long time for bosses & coworkers to figure out exactly how completely useless he was. These people are rare. The systems assume they don't exist and sociopaths take advantage of that weakness.
Around the same time I was hearing the story of a largish company (~$0.5b) bought by a hedge fund and placed in the hands of an 'A-Player' team of senior executives. I knew a manager and long term (20yrs) employee there who narrated the story for me over a couple of years. Outsiders to the company and industry, making salaries an order of magnitude higher than the previous executive team. They proceeded to ruin the company. But, they managed to conceal a lot of that. Milking or liquidating assets. SUing something like a leveraged buyout to raise massive funds to acquire companies. The owners eventually figured it out. The abysmal CEO and his team of executives were paid to leave and every one landed a CEO/COO job at an even bigger company. If they had happened on a win, I'm sure they would have done even better.
After reading 'The Gervais Principle' I saw a bunch of examples of these 'sociopathic machinations' that are much more available to the average person. Just about any mid level manager at any company can take big risks. Draw up massive plans for expensive expansions. Pitch advertising campaigns. Offer to take on impossible product development. Propose to open a new office in another country. Promise huge benefits and demand huge resources. Say you are 100% sure it will work. You might get what you ask for. If you get it, it starts. If you don't, whats the worst that can happen? Maybe your proposals get shot down by a sane senior. That might hurt your status marginally. No big deal. You're more likely to walk away with a small win for initiative. If you get the resources and proceed to balls up your project, you can always quit. If you are in a position to find a similar job, thats not a big loss. If you hit the eject button at the appropriate time and still walk away with a win. You can time it so you are negotiating to be poached while running this doomed program. If it all works out, you are the author of a coup.
A normal company is not resilient to this type of attack because its pretty rare and it's not usually identified if it does happen. Companies are based on an assumption that people aren't like that. The normal deal is that the company takes on the relatively small risk of employees being unproductive. In exchange they take all the upside. A sociopath flips it, taking on massive risk the company is on the hook for and capture some of the rewards. They're own risk is capped at a pretty low level so the more reward the better, regardless of risk. In an extreme case they might lose their job and take a reputation hit, but most likely they'll just leave and get a higher salary elsewhere. It's like taking money out of a company account to the casino. If you double it, you keep the profit. The moral hazard is always there. Most people just aren't corrupted by it.
Moral hazard is the right word for this. Morality is what prevents it in normal circumstances. Sociopath is a bad word for it, because it implies some sort of born pathology. That probably exists, but more often it is a learned behavior. Human morality is absorbed from the environment. If you get a bunch of these sociopaths together, they will rub off on other people. That's how sociopaths breed. It's like a cancerous meme.
I don't have suggestions for dealing with it.
This occurred to me reading your story of the guy who barely made it through school. You know, telling the story from the guy's point of view might be more useful. Here he is, struggling with the system, and over time and with enough effort he manages to claw his way into a future that he's created for himself.
Same goes for the CEOs "ruining" the company. Get a new executive job, the board of directors are a bunch of idiots, nobody wants to take ownership and the ship is going to sink one way or another. So you keep the ship afloat as long as possible. Meanwhile, since you've managed to keep the company viable much longer than most others could, you get a nice reward.
I'm not saying that these people aren't morally defective in some way, only that you, as the author, are applying a moral judgment to the story that the reader needs to be aware of. I could tell these same stories much differently.
From my own personal experience, I find I understand systems well enough when I can assume that all players are acting in good faith and intelligently. I don't need dumb people at the bottom or sociopaths at the top. In fact, that's the irony of it all: once you begin to make moral judgments about the qualities of various people in systems, it becomes much easier to behave in ways that most folks would find offensive.
Just thought I'd point that out. Nice stories.
Netcan's point isn't that people at the top are sociopaths and people at the bottom are dumb. It's much more complicated than that. Bad systems set up moral hazards which incentivise sociopathic behaviour. Different people react to moral hazards in different ways. However, once one person (who may be morally deficient) starts following the incentives, many other people (most of whom are simply normal flawed humans) will follow suit. Thus, practically dealing with the problem means treating it as a flaw the design of the system, not in the individual actors.
So there's no room in your worldview for people at the top who act in their own self interest to the detriment of others and the company as a whole? And everyone that thinks they see that happening just doesn't understand the system well enough?
How charmingly naive.
Certainly there are bad actors, everywhere you look.
The point here is that letting my own personal feelings or morality shade my analysis leads to poor results. Systems are bad even when full of good people. In fact, that's the hell of the thing. Good people in bad systems act in bad ways.
Confusing the matter with long-winded diatribes about the personal qualities of the various participants might make me feel good, but it is not helpful. If It makes you feel any better, you can also assume that the system is full of sociopaths. Works the same way. The key here is that you can't start confusing your own personal judgments about the morals of people inside the system with your opinion about the system as a whole.
There's a great discussion here about how a good person should act in a bad system. Resign? Speak out? But that discussion is also not related to analyzing the system as a whole.
What if the judgement is that the system would be fine if it wasn't full of sociopaths?
>> Good people in bad systems act in bad ways.
That would make them bad people. For instance, before pollution laws came along, but it was known that polluting was bad, the people that did it were still bad people regardless of the system. The system had to be adjusted to take account of the bad actors.
Letting your own personal morality shade your analysis is very useful, we should have a system which encourages moral action rather than rewarding immoral action. Imagining a system full of bad actors gives us the ability to refine it.
We'll never agree on what's moral, of course, but that is an item for public debate.
Judgemental, much? I think you're presupposing that people have far more autonomy than they actually do in society and business. Moreover, you're making a judgement that any amount of sin automatically makes you a bad person, regardless of the circumstances.
Let's say you're a line worker at <big box retailer>. You notice the store manager embezzling petty cash. At the same time, you also know that the promise of anonymity in reporting the store manager is bullshit, and there's a high probability that you'll be fired long before the investigation of the store manager is completed. Meanwhile, if you do nothing, the store manager will get caught up in an audit eventually, and will get fired/prosecuted anyway. Do you report the store manager? Or do you go along, not participating, but not rocking the boat, either? Most importantly, does your moral calculus change if you have dependents who are reliant on your income for food, clothing and shelter?
The statement was pretty unequivocal - "Bad systems make good people act in bad ways".
If the actions (pollution in my example) are unequivocally bad (which they are) then regardless of the system the actors are bad people.
It's not clear in your argument that the worker is acting in a bad way in the grand scheme of things, he/she is basically passive which is a different thing. The manager is certainly a bad person. But I would also be the first to agree that any morality is mutable, hence the thought that systems should be adjusted on the will of society rather than individuals.
>> I think you're presupposing that people have far more autonomy than they actually do in society and business.
Someone takes the decision to dump raw sewage in the river, or toxic waste or whatever. Regardless of how many layers of bureaucracy they hide behind, they are bad people.
The problem is that it's only "bad" when you look at it from the outside. You can point to this person or that person and say, "You're bad," or "You're evil," and smugly congratulate yourself that you would never act in such a fashion. You don't know what pressures or incentives they were subject to. You don't know what other choices they had. Moreover, your approach puts the blame on the line workers - the worker dumping the oil into the storm drain, the truck driver driving 20 hours a day, the manager writing up a justification of why an unreasonable risk is reasonable after all - while assigning no culpability to the leadership of the organization that created the circumstances where those actions were the most reasonable alternative. You expect people to stand up and throw themselves into the gears of the machine even if the inevitable consequence is that they get crushed, and the machine rolls on, heedless.
I used to think in much the same fashion. But then I read a very powerful book: Diane Vaughan's Challenger Launch Decision. I would challenge you to read that book and identify, of all the people involved in the decision to launch the Challenger on that fateful day, which one acted in an evil manner? Which engineer wasn't at least trying to act in the best interest of the organization and the crew?
That's the point I'm trying to make. People can be trying to good, but, because of the information available to them, the incentives they operate under, and the time or social pressure they're subject to, their actions can work towards bad outcomes. Tarring those people as "bad" or "evil" does nothing to change the organization that those people operate under, and simply ensures that the next person in the same position in the organization just makes the same mistakes.
I mean, here we're saying "good" and "bad" without really defining terms. If "good" means acting socially responsibly then corporations are a great example of what I'm talking about. The shareholder-director framework is a system that allows very little room for socially responsible behaviour. Shareholders are human beings, with normal human values, but legally, the director must solely represent their financial interests or risk getting sued. For a CEO to act in a socially responsible way, they should believe that acting otherwise will reduce their profit (e.g. through damage to public image). Based on various scandals in the past, many people characterise CEOs as being sociopaths. The more interesting point is that the job itself is essentially sociopathic.
So, while I think the discussion about how a good person should act in a bad system is interesting, I'm much more interested in figuring out how to create systems which incentivise good behaviour in the long term. For example, why couldn't we have a corporate charter which explicitly valued long term growth or customer satisfaction or public image or job creation. That is, instead of just having a director with a goal that is "maximise PROFIT", have their goals be a more complex optimisation e.g. "maximise XPROFIT + YNUMBER_OF_EMPLOYEES_WITH_DECENT_LIVING_WAGE - Z*CARBON_FOOTPRINT". Wouldn't it be cool to invest in or work for a company that explicitly shared some of your own personal values?
This would be very cool. The problem is, these companies are a rare breed - especially for publicly held companies.
You have an odd definition of good people. People who act in bad ways aren't good people, regardless of the system. Good people remove themselves from situations and systems that try and compromise their morals.
And it's not always possible to just go find a different situation.
So yea, we need good systems because quite frankly, most people aren't actually good people, they're only good when things are easy. Moral hazard is a serious problem in any system that needs to be addressed because people respond to incentives and aren't nearly as good as they think they are.
This is why a good social safety net is important for society, it keeps people from being forced into crime because of poverty. People should be able to walk away from bad situations and fall back on the safety net rather than being forced by the situation to be bad.
You are free to use different terminology, of course.
But like I said, this is mainly a terminology distinction, so I don't have any great problem with your version.
I divide my officers into four groups. There are clever, diligent, stupid, and lazy officers. Usually two characteristics are combined. Some are clever and diligent -- their place is the General Staff. The next lot are stupid and lazy -- they make up 90 percent of every army and are suited to routine duties. Anyone who is both clever and lazy is qualified for the highest leadership duties, because he possesses the intellectual clarity and the composure necessary for difficult decisions. One must beware of anyone who is stupid and diligent -- he must not be entrusted with any responsibility because he will always cause only mischief.
I think that summarizes your point. :-)
To answer, "How do we deal with it?" Make the owners and lenders of firms responsible. If a CEO or other employee screws up a company, take the shareholders to 0, then take the bondholders to 0, then take the counterparties to 0. People won't want to do business with people taking crazy risks. The market knew that AIG was gambling bigtime. If folks thought their trades might go to 0, AIG would have never been given so much rope.
It's a tough issue though. There's game theory behind it too. If everyone makes the same high risk trade, and you don't, you can't win. If they're right - they get paid, and you get fired for underperformance. If they're wrong, the system collapses and nobody gets paid.
Here's the trouble with that: You haven't solved the mundane version where a mid level manager destroys a division of a large corporation but not the entire corporation. In that case, shareholders losing a large chunk of money is what already happens today. They lose the value of the entire division, and they therefore have a large incentive to prevent it. But it still happens. The shareholders in general have devised no universally effective way to prevent it.
If you increase their exposure, you haven't given them any new defense to the attack, so all you really end up doing is encouraging them not to invest in stocks because stocks now have increased risk over other investment securities.
Your proposal is, essentially, to put incentives in place for the market to solve the problem, and then you assume without proof that with the right incentives the market will solve the problem. But someday somewhere you actually need a solution which parties wanting to avoid being damaged can employ to solve the underlying problem, ideally without overcompensating and causing parties to become unduly risk-averse.
As a corporate insider I can encourage systems where people have the right balance between risk taking and risk aversion. (Most large companies are too risk averse. Try implementing a change initiative at one.)
In theory. But if that isn't what happens in practice then what good is it?
> But if the govt doesn't have to bail out a firm, who outside it should worry?
You don't have to worry about the shareholders of some individual mismanaged corporation, what you have to worry about is that the principle you're trying to apply to prevent systemic risk has an established track record of being ineffective when applied to prevent internal risk, and it is not clear why you should expect any different result.
Again, the trouble is that you need a solution to the underlying problem. What "systems to minimize the risks" are there that corporations could cost effectively employ but are not already in place? How do you fix the problem that in a competitive market a company that spends resources on managing risks will be at a short-term disadvantage against a company that takes blind risks, and may consequently not survive long enough to see the day when its competitor has to pay the price for its risk taking?
But I think that assymetric risk and moral hazard is just a reality of the world sometimes. It can't be completely eliminated.
One way to solve this is to have laws where you can go back to the seller. Another way is to have a 3rd party provide a warranty.
Similarly in Financial Markets, you can reduce the moral hazard with smart design. You'll still have some residual, but such is the nature of human interactions.
In the UK, I've overheard the term "Seagull Management" used; "Fly in, shit everywhere, fly off".
A mostly off-topic anecdote: this makes me think of my first job, as an intern. I was working for a senior tech manager, and I remember this moment clearly. I had only been working for the company for a few weeks. We were in his office, and he received a phone call. He was on the phone for a while, and I could hear him committing to some things. After he got off the phone he explained the call to me and explained his approach to working in the corporation.
The person who had called him was a peer from another manager. The person had asked him to help with another project that they were working on. I could hear on the call that he verbally agreed to whatever it was that they were asking. He was quite agreeable. However, he told me afterward, that he had no intention of following through. He pointed to an org chart on the wall. There were several people on the chart highlighted. He proceeded to explain the rules: I would have two people that I must impress: my boss's boss, and my boss's boss's boss. To everyone else, I must be amiable and agreeable but to never actually do work. I must present myself well and to say interesting things in meetings. But, my work should be directed at helping those two people achieve their career goals while being as visible as possible in the process.
I thought this was clearly a cynical way of living. However, it was quite successful for this guy. I stayed on with the company for several years after I graduated. During that time, my mentor had been promoted to VP and then general manager. With his help I was promoted to his old position.
I don't think that these types of people are all that rare, unfortunately.
In the end, I had way too much 'moral fiber' to continue on that path. Taking his sociopathic approach always grated internal to me - it just felt wrong. I didn't have enough motivation for success to quell the feeling. I ended up abandoning management (even though I thought myself a fairly effective manager and leader), and going back to be a 'loser' at the bottom.
Luckily for me, the tech world has grown enough in the time since that demand for our loser jobs is really high. I am now able to do fun things, develop projects, feel good about the work that I do, and in the end actually make a really good living. However, most people aren't in such a situation. They must play this absurd game to get ahead.
Maybe I'm misunderstanding what you're saying here, but I don't see it as being all that bad.
Sometimes when I go to meetings I don't know what the overall "strategy" is of my boss. I don't want to stay things that might fuck up his plans, so if a client is asking me whether we are doing X and we should be doing X, I don't immediately say "no that's a bad idea" even if I think so, because I know the value of presenting a unified front.
Behind the scenes I can tell my boss that I don't think doing X is a good idea, but ultimately people tend to be wishy-washy and showing a lack of confidence or a lack of cohesion with your team is a bad thing in and of itself.
Some organizations are very much about cross-organizational teamwork. The bosses have very broad spans of control, and they expect their underlings to work things out between each other. These cultures promote teamwork. The downside is accountability sometimes gets lost.
What's interesting is both types of firms sound similar from the outside. Everyone talks about the importance of teamwork. Once you get inside, or see how they work, you realize it's not always that way.
A couple examples... In general banks generally support the "As long as you hit your # and you make your boss look good, you're ok" mindset. Some firms (Goldman Sachs - like them or not) do find a way to cooperate, and bring the entire breadth of the firm to their customers. Others are much more of a "Every desk for themselves" mindset.
Some consulting firms tend to be good about bringing the best experts from around the world to solve problems. (McKinsey for example, again like them or not) Others are very local office driven, with everyone worrying about their own P&Ls.
It seems to me that the vast majority of people are timid, conservative, and simply too afraid to do anything. The sociopathic business hustler types I've met may be awful people, total assholes who stomp on everyone they can, but they also are unafraid. They're initiators. They make things happen.
It seems sometimes like there's two kinds of people in the world: monsters and the timid. Heroes only exist in comic books.
If this is true, then perhaps societies and economies tolerate the antics of the sociopaths because they are the only people who initiate new actions on a large scale. I definitely see that tolerance in peoples' attitudes toward "captains of industry" who have obvious narcissistic or sociopathic leanings: "sure he's an arsehole but without him there would be no X."
There's plenty of people who mean well, and are "doers".
Personality traits tend to be normally distributed. There's a few heroes, a few monsters, and a lot of in-betweeners; even if you're just looking at people with low anxiety and low agreeableness.
And there's a reason why a lot of those "in between" movers and shakers don't try to take down the assholes - it's because these assholes generally go down in flames, eventually. It's generally not from some Batman figure taking them on, but a quantum of their peers going "nope, fuck that guy" when they temporarily hit a wall, and need someone to throw them a line.
Based on the pitch/plan of the manager of the Stamford branch the C level executives plan to close the Scranton branch and make the manager of Stamford the head of the northeast division. The Stamford manager leverages this new potential position to get a C level position at Staples thus destroying all plans that Dunder Miflin had made.
This example isn't cited in the Gervais Principle series but is a classic example of the sociopath layer devising a heads I win tails you lose scenario
1. Keep companies small.
2. Ensure top level management has skin in the game (e.g. partnership).
Neo-Marxists find it ridiculous to think that we can have a handful of billionaires & corporations controlling all the wealth in a country without that handful manipulating and controlling the political system. Big money has always come hand in hand with power. It's silly to expect morality to fix this. The super wealthy will control government. We can either be ruled by the wealthy or we can eliminate wealth of this magnitude. Those are the only choices.
Personally I think both of these are naive, in much the same way. They are modernist ideas that assume an understanding we just don't have. Human systems are complex and cannot be designed. The idea that we can start with a limited set of laws and a small government and let everything else emerge, and that the consequences of that emergence (including the political ones that may derail it) will be acceptable is not that different from the old communist 10 year plans.
Ideas like skin-in-the-game are in that category, IMO. Useful as a perspective. Sometimes useful in practice. Not realistic as a solution in many/most cases. Sometimes the world present opportunities for asymmetric risk. Even if we go by the Hammurabi code suggested by Nassim Taleb (currently promoting this idea) of killing an architect who's building collapses there is potential for asymmetric risk. Maybe its small and asymmetric enough to be worth it (5% chance of killing 100 people; huge commission; the architect is old anyway) Maybe the immortal legacy of building a temple is worth the risk of death to the architect, but not the risk of death to the worshipers.
My point was that I don't think we can build systems (or meta systems that let systems emerge) that don't have a risk of moral hazard. Moral hazards exist. Usually morality is the anecdote. Sometimes it isn't
edit: added paragraph
Personally I don't think the current meta-systems we have in Western capitalist democracies are optimal. I'm sure that better can be done. However, I'm also very sure that we can't do better by building on idealistic principles - because of the massive changes that would entail and the corresponding unpredictability of the results.
It's interesting that libertarians and neo-marxists basically want a really extreme change in two directions that almost never happen. The rich tend to always get richer, the government tends to always get bigger in size and scope. I guess this is kind of like the "get rid of it entirely" mentality. Perhaps it would be better to seek out changes to our current system that would allow iterations towards reducing income disparity and shrinking of the government.
Nice post, thanks for writing. It's interesting how we don't then focus (at least in the now secular West) on ways for morality to be seeped into our collective consciousness. The answer historically has always been religion (at least in the last few millenia) but today people get all jumpy when even trying to talk about it.
I'm not sure how religion plays into things. You can see on the thread a very strong example of how modernism still dominates a lot of our thinking. We want to be able to place 'moral issues' into rational epistemological frameworks or political theories. I have the same instincts. Does game theory work here? Can we tweak & changing the legal definition of corporations or encouraging limited partnerships to avoid this or that pathology?
You're right that even talking about morality feels religious. I think its a mistake to avoid dealing with morality as an independent thing. These attempts to get morality from amorality are a dead end, I think. I don't accept that politicians are inevitably amoral slaves to political expediency. That's bullshit. Even the US, with it "conservative" streak of libertarian-rationalism was built by people of moral virtue or at the very least a mythology of those people. Fuzzy as it is, morality is a central part of being human.
Similar downsides as a large central government, but you have no vote unless you're massively wealthy/powerful.
It's better than nothing, sure. But let's not forget that over half of Richard Fuld's wealth was in Lehman Brothers stock. It didn't prevent him from flying his company straight into the ground.
Isn't it ironic that we are so quick to bring about arguments regarding the inefficiencies of command economies and big governments due to corruption, bureaucracy, and misalignment of government worker incentives, when our economy is made up of these same smaller scale command economies exhibiting these same problems and inefficiencies?
How about types of employers based on their attitude to employees? It's a two-way relation after all.
Loopholes will always be exploited. If a financial institution decides not to exploit a potentially profitable opportunity, someone else will (and reap the rewards). After a while, your shareholders are going to be asking pointed questions about why your competitors are more profitable. Eventually, you're likely to be fired and replaced, or your company will be acquired by one of your more profitable competitors. Thus, in a Darwinistic fashion, those who exploit the loopholes prosper, while those to stand on their principles are eclipsed and, ultimately, perish.
Risk and reward are inextricably linked. You can't have one without the other. So, wherever you have the potential for profit (i.e. reward), you have the risk of failure. The fact that some banks were allowed to become too big to fail is a regulatory failure, and the regulators get their marching orders from Congress, which is elected by the People.
It's also worth bearing in mind that the US government looks set to make a handsome profit on its "bail-outs" (many of which were actually investments into, or loans to companies, which have yielded dividend or interest returns): http://projects.propublica.org/bailout/
Perhaps that's unfortunate depending on one's point of view and/or political leanings but that's how the free market works.
It genuinely baffles me that people might think of something's being socially worthless, but commercially valuable as a feature.
Socially worthless or not, that's how the world works. I'm not trying to be a corporate cheerleader. It is what it is.
For example, pollution is an activity which is often commercially valuable (in that polluting can help a factory produce a given product without paying the costs of mitigating the pollution). But it's socially undesirable, and we restrict it. We don't just throw up our hands and say, "well, it's commercially valuable, that's how the free market works, I guess we just have to breathe brown air".
"If I ordered a general to fly from one flower to another like a butterfly, or to write a tragic drama, or to change himself into a sea bird, and if the general did not carry out the order that he had received, which one of us would be in the wrong?" the king demanded. "The general, or myself?"
You can not just wish any rules and laws of human or physical nature. You can tell people to fly like butterflies, but when they do not, your anger at them would be misdirected. If you try to act as if there are no rules except ones you invent, you, not unlike many socialists that imagine they can ignore the laws of nature, are in for a lot of unpleasant surprises. You can blame the evil capitalists - just like Venezuelan government, having mismanaged the country for years to the point they have now shortage of toilet paper (why is it always the toilet paper? that basic thing has some very bad luck with socialists) now blames the capitalists and hidden enemies. But that won't do you any good, as it doesn't do any good for them. Until you recognize the rules of the system is not purely under your control, you won't get very far.
Because if it isn't, then you have to admit that we can make some changes to the system. Reasonable people might disagree as to the type and extent of changes that would "work", but they would all agree that some sort of changes would improve things. In other words, there are things the general could be ordered to do that would not be absurd or impossible for a general to accomplish, like marching around in shiny shoes, or invading another country.
Quoting a French dude doesn't make your argument better, it just helps illustrate how little you thought about your words before hitting "reply".
No, it's not. Repeating for those who TLDR the pervious comment: you can not just invent any rules you like. There exist rules that are there regardless of your desires. I hope you see the difference between this and "is the one, single way in which things could be arranged".
>>> we can make some changes to the system
Of course we can. We just need to understand we can not make any changes but just some and in certain ways, and those some changes have to be done right. People can fly. You just need to follow certain rules and do certain tricks. If you try to fly without following those rules, you may die or be badly hurt. So may a society if it tries to make changes without following the rules.
>>> Quoting a French dude doesn't make your argument better,
I would advise you to familiarize yourself with who the "French dude" is. That would make your life richer and your understanding of the world fuller. It would also hopefully make you understand why I quoted him.
> We, as a polity, control the rules of the system in
> which all this stuff happens. If the system we've
> built exhibits behaviors that we find undesirable,
> then we can change the rules.
Your comment, as you have explained it, is therefore completely pointless. You were arguing with a straw man more or less.
The "heads I win, tails you lose" nature of highly leveraged firms increased the risk of systemic failure in the financial system. Those systemic risks are a socially-undesirable negative externality. And they're not inevitable! They're the result of lax regulation.
You're right that we don't control the laws of nature. But we do control the rules of our financial system!
>>> They're the result of lax regulation.
Here it goes again, the illusion you could control everything if only you had enough government people sitting everywhere and looking at everything. Unfortunately, it does not work this way. More regulation would not help you avoid financial calamities - first, because the guys who would regulate it would have absolutely no idea where the calamity would come from, because they are not prophets. If it would be easily preventable, then it would be easily prevented. The ones that aren't prevented - aren't easy to foresee. Second - because the only guys who understand how the things really work would be the same people who work in the depth of the industry - look up "regulatory capture". Third - the regulatory agencies would be controlled by politicians, which means whatever was not captured by the lobbies would be captured by partisan interests. If after reading this you think "I like this picture, give me more of it!" - then more regulation is the recipe for you.
>>> we do control the rules of our financial system!
Unfortunately, this financial system is not a mathematical abstraction we can define any way we like, and thus is controlled by the laws of nature. Thus you can define any rules, but the consequences of such rules may surprise you.
This is a bad way to start your comment because it is an absolutist, indefensible statement. It is plain wrong, in part because you are not explicit about the quantifiers that are involved. Might I suggest that in the future, you try something more along the lines of:
Yes, we can change the law, though we need to be aware of the limitations of such changes because there are some rules, underlying human nature, that we cannot change.
I believe that mostly captures what your position appears to be, and it expresses it much more succinctly and effectively, even without silly quotations of fancy authors.
Quote yourself: "Changing the rules so that people would be more responsible for their own mistakes can be done." ( https://news.ycombinator.com/item?id=6845656 )
The poster they replied to said "we control the rules of the system in which all this stuff happens" -- this is true. To then respond that we can't bend every single physical law isn't a point, it's so silly I wouldn't have bothered responding to it, hadn't I noticed smsm42 contradicted themselves later in another post.
smsm42's point is that one can't say "this is how the economy shall work"; that doesn't contradict the possibility of tweaking certain aspects of the current economy.
This is obviously wrong, because we (as society) control all the rules that are written into law.
This whole back and forth could have been avoided if smsm42 had instead written: "Yes, we can change the law, though we need to be aware of the limitations of such changes because there are some rules, underlying human nature, that we cannot change."
Much more conducive to a productive argument, don't you think? It even works without appeal to authority via silly quotes!
But the post smsm42 originally replied to didn't wrong "the rules that are written into law", but "the rules of the system in which all this stuff happens". Which (according to smsm42) includes other rules that are not written into law (those underlying human nature) and which we don't control.
It's a matter of perspective, but I don't think that paints the image that smsm42 wanted to portray. I feel it's more "Hayek-ian" than that.
That's quite possible because of course I was going from my impression and trying to read between the lines.
That was kind of the point of my comment: If he'd been less absolutist in his statement, and acknowledged that surrealize had a point, we might have found out what his position actually was. Now we may never know...
"Futilism is futile." -- Imade Thatup
Obviously the market is not 100% deregulated. Thank you for your insight.
I think Wall Street likes the market just like it is.
This activity is either not the free market, or it is the free market failing to work. Why would anyone celebrate this?
edit: I see from your other comment you are not celebrating, but fatalistically claiming that (our attempt at a) free market is fundamentally broken and unfixable. I feel this point would be clearer if you separated the implementation and theory of the free market.
In which case no, I don't "know much about" the finance industry.
If you're ever in the position to run a large corporation and need to raise money publicly, you're free to sidestep the banks and do it yourself. You'll probably get a sense of the value they offer at that point.
Readers don't understanding the sheer duplicitous nature of the media, even the liberal ones who appear critical towards the banks. They simply don't explain the facts that would result in the public asking for bank chiefs to be summarily executed like they occasionally do in China. It makes you wonder whether the writer is a shill, whether the editor chose the most clueless reporter to write about the issue, deliberately or otherwise. I never understood why Max Keiser repeatedly called for the bankers to be hanged until I read Griftopia by Matt Taibbi. Its such an eye opener. I can't even understand most of the instruments involved I see enough to understand why Max Keiser called for their hanging.
Turner’s viewpoint caused consternation in the City of London, the world’s largest financial market? Is the writer serious? That is the City sounding like Brer Rabbit asking not to be thrown in the briar patch.
Let us take US for instance. $1.4 trillion would have been enough to pay of the all subprime mortgages which were allegedly at the heart of the crisis. Why then will the bailout cost $15 trillion? Who then incurred the additional $14 trillion in debt taxpayers, their grandchildren and their great grandchildren are saddled with?
Turner's statement that what investment bankers do is socially worthless must be the understatement of the millennium.