Dylan Minor — CEOs with Lots of Stock Options Are More Likely to Break Laws

Perverse incentives.

Harvard Business Review
CEOs with Lots of Stock Options Are More Likely to Break Laws

Dylan Minor | visiting assistant professor at Harvard Business School and assistant professor at the Kellogg School of Management

Bill Black — Mankiw Morality in a Mash Up with Mankiw Myths

Classic smackdown of Mankiw, part one.

New Economic Perspectives
Mankiw Morality in a Mash Up with Mankiw Myths
William K. Black | Associate Professor of Economics and Law, UMKC

My comment there:

1. Nice takedown. 

   Alan Greenspan himself admitted making a mistake in assuming deregulation would not be taken advantage of by leaders who would undermine their own institutions owing to perverse personal incentives.

   Greenspan - I was wrong about the economy. Sort of

   A perverse incentive is one that promotes rent-seeking, which is a form of free riding – in biological terms, parasitism. Neoclassical economics was designed to ignore or minimize the concepts of economic rent and rent-seeking that lie at the foundation of classical economics. 

   Historically, this can be traced to a reaction to Karl Marx and Henry George’s success at the time in calling attention to rent, which is another name for exploitation where rent extraction involves unpaid work rather than simply criminal or corrupt behavior. 

   The counter-attack was led by John Bates Clark, whose has been memorialized in conventional economic through the John Bates Clark medal. That’s right, they give a medal for this stuff!

   
   

Dean Baker — Washington Post Pushes for Government Guaranteed Subprime Mortgage Backed Securities

The bulk of its lead editorialtouting the prospects for bipartisanship is focused on pushing the Johnson-Crapo bill, a measure that would replace Fannie Mae and Freddie Mac with a system whereby the government guarantees 90 percent of the value of privately issued mortgage backed securities (MBS). This means that Goldman Sachs, Citigroup and other folks who might issue MBS could now tell their customers that even in a worst case scenario they couldn't lose more than 10 percent of the value of their securities. 

Fans of the market should be asking two questions here. What problem is this intended to solve? And why do private issuers need a government guarantee?

More moral hazard and perverse incentives in FIRE.

Beat the Press
Washington Post Pushes for Government Guaranteed Subprime Mortgage Backed Securities

Dean Baker

Shahien Nasiripou — New York Fed Chief Levels Explosive Charge Against Big Banks

The head of the Federal Reserve Bank of New York said Thursday that some of America’s largest financial institutions appear to lack respect for the law, a potentially explosive charge against an industry already roiling from numerous government investigations into alleged wrongdoing.

William Dudley, one of the nation’s top banking regulators whose organization helps oversee Wall Street banks including JPMorgan Chase and Citigroup, made the comment during a speech focused on the problems posed by banks perceived to be “too big to fail,” and possible solutions to correct them.

But in an abrupt turn, Dudley suggested that regulators may be stymied by "cultural" issues that have negatively affected the nation's biggest banks.

“Collectively, these enhancements to our current regime may not solve another important problem evident within some large financial institutions -- the apparent lack of respect for law, regulation and the public trust," he said.

“There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” he continued. “Whether this is due to size and complexity, bad incentives, or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.”

Is Bill Dudley finally reading Bill Black?

The Huffington Post
New York Fed Chief Levels Explosive Charge Against Big Banks
Shahien Nasiripour

Brad Wieners interviews Michael Lewis — Michael Lewis on the Next Crisis

What surprised you most while reporting on the crisis?

The realization that it had actually paid for everyone to behave the way they behaved. Working on The Big Short, I first thought of it as this bet, and there were winners and losers on both sides of the bet. In one sense there was—but on Wall Street, even the losers got rich. So that was the thing I couldn’t get out of my head: that failure was so well-rewarded. It wasn’t that they’d been foolish and idiotic. They’d been incentivized to do disastrous things.

Henry Paulson, the man behind the bank bailouts, recently said, “The root cause of every financial crisis is flawed government policies.” Is that fair?

Some of the government’s policies have been idiotic. But the idea that the story begins and ends with government policy is insane. Wall Street, all by itself, orchestrated the crisis by a web of deceit that was breathtaking. If Wall Street continues to operate in that spirit, I would argue that there’s almost nothing the government can do to prevent them from doing bad things. Incentives are at the bottom of it all. At the gambling end of Wall Street, the people who are making decisions are making decisions not with their money, but with other people’s money, [so] they themselves are not personally responsible.

Bloomberg Businessweek
Michael Lewis on the Next Crisis
Brad Wieners