Thursday, September 24, 2009

Why Jail Murderers?

There Are No Villains in Financial Crises:

Actual title. I did not make it, or any of the following quotes, up, I promise.

Who led us into the financial crisis, and why? Zubin Jelveh writes up some intriguing findings calling into question the notion that securitization was at the heart of the financial crisis:
Meanwhile, Tyler Cowen points to some evidence that banker pay wasn't at fault, either:
The evidence I presented in my latest article, which deals in part with banker pay, also suggests that banker pay doesn't cause risk; rather, as the financial system gets more complicated (and therefore riskier, because it's harder to properly understand), there are more profits to be earned, because the returns to knowledge/skill are higher.
But, even pretending her premises are sound, this conclusion in no way argues for greater regulatory oversight of such massive and risky markets. In fact, I'm getting distracted, the point is don't blame the rich folk who fucked up the entire world's economy for fucking up the entire world's economy while making themselves rich(er);
All of these papers suggest that the search for a villain behind the crisis will ultimately be fruitless.
I find it vastly more plausible, if not so comforting, to believe that systems can occasionally produce bad results even if the incentives basically point in the right direction. The FICO score revolution was valuable, but we took it too far. The money sloshing around US markets disguised the problems, because people who got into trouble tapped their home equity, or in a pinch, sold the house at a tidy profit. Everyone from borrowers to regulators was getting the same bad signal, that their behavior was much less risky than it actually was.
Is it just me, or does it sound like Megan is trying to blame the market itself? I'd call her a heretic, except she's so deep in market veneration it sounds more like she thinks this meltdown was more of a feature than a bug. After all, the "right" people are the ones now recovering their net worth and getting back to living lavish lifestyles, so maybe the market was just teaching them a little lesson. It's not like the people still unemployed or who lost their homes matter, so long as the important people are back on track.
That doesn't mean that nothing can be done. Maybe we decide we want a less complex financial system. But it won't be because there's some villain manipulating everything into ruin; rather, we may decide that there are certain kinds of risks we can trust ourselves to handle.
I'm not sure that this would work, and I'm skeptical that it's a good idea. But the more time we waste trying to figure out who did us wrong, the less quickly we will arrive at an actual solution.
In other words, no mistakes were actually made, the market functioned as it should, and anything we try to do will be the real mistake. Trying to take the masters of the universe to task for their mistakes is like yelling at God for Katrina. Sacrifices were made for the good of the greater people, and shall be again. Such are the mysteries of the holy market, and we mortals would be fools to try to interfere.


shane said...

How much straw can one woman put in a post? FICO scores? Banker pay? You're right, Megan, none of these things are the sole reason the federal government had to inject 700 billion fucking dollars into the banking system in order to avert a global meltdown.

Andrew W said...

There are more profits to be earned, because the returns to knowledge/skill are higher.

I wonder where all that money actually comes from. Where does that money come from? It's like magic. Sheer cleverness transmutes to gold.

You don't have to create goods or perform services -- just sit in the right chair and pour tokens this way and that, and, by dint of being superior, you are handed millions of these tokens which give you the right to demand colossal quantities of goods and services from others. Marvellous.