April 3, 2012 4:32 AM Subscribe
The Incentive Bubble
posted by kliuless (54 comments total)
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) - "The fraying of the compact of American capitalism by rising income inequality and repeated governance crises is disturbing. But misallocations of financial, real, and human capital arising from the financial-incentive bubble are much more worrisome to those concerned with the competitiveness of the American economy."
An economy can be only as strong as the allocation mechanisms that ensure that capital of all types moves toward its highest social use. When risk is repeatedly mispriced because investors enjoy skewed incentive schemes, financial capital is being misallocated. When managers undertake unwise investments or mergers in order to meet expectations that will trigger large compensation packages, real capital is being misallocated. And when relative compensation is as distorted as it has been by the financial-incentive bubble over the past several decades, one can only assume that human capital is being misallocated, to a disturbing degree. Awakening our monitors to their responsibilities and to the flaws of market-based compensation provides the best hope for correcting these misallocations and strengthening the U.S. economy for the challenges of this century.Satyajit Das:
Pravda The Economist's Take on Financial Innovation
- "There is no acknowledgement that much of what is called financial innovation is economic rent extraction
, exploiting lack of transparency as well as information and knowledge asymmetries. There is no discussion of the destructive bonus culture which encourages certain behaviours in financial institutions... The unpalatable reality that few, self interested industry participants and their cheerleaders are prepared to admit is that much of what passes for financial innovation is specifically designed to conceal risk, obfuscate investors and reduce transparency. The process is entirely deliberate. Efficiency and transparency is not consistent with the high profit margins on Wall Street and the City. Financial products need to be opaque and priced inefficiently
to produce excessive profits
Wall Street's Broken Windows
- "James Q. Wilson was a political scientist who often studied the government response to blue collar crime. The public knows him best for his theory called 'broken windows...' Wilson took social norms, community, and ethics seriously. He argued that as community broke down fewer honest citizens were active in monitoring and policing behavior. The breakdown in community was criminogenic
– it led to widespread serious blue collar crime. He urged us to take even minor blue collar crimes and breaches of civility seriously and to demand that they be contained through social pressure and policing... Similarly, corruption that is excused and tolerated by elites is unlikely to remain at the level of 'a few deals.' Corruption is likely to spread in incidence and severity precisely because it undermines community and the rule of law and it is likely to grow more pervasive and harmful the more we tolerate it."