Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”reducing the problem to looting i think helps put things in perspective...
The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.
In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.
The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”
On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the “Looting” paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called “excessive risk-taking.” To prevent such problems in the future, he called for tougher regulation.
Now, it would have been nice if the Fed had shown some of this regulatory zeal before the worst financial crisis since the Great Depression. But that day has passed. So people are rightly starting to think about building a new, less vulnerable financial system.
And “Looting” provides a really useful framework. The paper’s message is that the promise of government bailouts isn’t merely one aspect of the problem. It is the core problem.
[...]
Do you remember the mea culpa that Alan Greenspan, Mr. Bernanke’s predecessor, delivered on Capitol Hill last fall? He said that he was “in a state of shocked disbelief” that “the self-interest” of Wall Street bankers hadn’t prevented this mess.
He shouldn’t have been. The looting theory explains why his laissez-faire theory didn’t hold up. The bankers were acting in their self-interest, after all.
[...]
In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it... given an incentive to loot, Wall Street did so. “If you think of the financial system as a whole,” Mr. Romer said, “it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury.”
[...]
If we don’t get rid of the incentive to loot, the only question is what form the next round of looting will take.
Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer — a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday — that the next candidate for looting already seemed to be taking shape.
It was an obscure little market called credit derivatives.
William Dudley, new president of the New York Federal Reserve Bank, on Friday accused bankers of exacerbating the financial crisis, saying some failed to raise capital quickly enough because they did not want to dilute their shareholdings.gimme the loot :P
Mr Dudley, in his first speech as head of the New York Fed, said executives at banks and government-sponsored enterprises told regulators “repeatedly over the past 18 months” that “now is not a good time to raise capital”.
“This desire to postpone capital raising stems in part to the fact that bank executives often do not want to dilute existing shareholders, which of course include themselves,” said Mr Dudley. “The self-interested thing to do is avoid the dilution and hope for a good state of the world.”
Mr Dudley, an economist at Goldman Sachs before he joined the New York Fed as executive vice-president of the markets group, was also fairly downbeat about the economy in a speech before the Council on Foreign Relations... He also cautioned that the president of the New York Fed should be independent of Wall Street and its pursuit of profit. “Self-regulation is to regulation as self-importance is to importance,” he said.
[...]
Mr Dudley was more upbeat about the prospects for the government’s Term Asset-Backed Security Loan Facility, which is designed to help boost the markets for securities backed by consumer and business loans. Mr Dudley said that by offering up to $9 of borrowed money for every dollar invested by potential buyers, “returns become very attractive”.
If Drum is right that...also re: getting paid...when it's over, guess what? Pretty much all the same people will be in charge. A few senior executives will be out of jobs, but that's about it. And the ones who replace them won't be much different....then God help us. There is no amount of money we can throw at a banking system that can't be "tunneled" or "looted" away. If we end up with similiar people, with a similar worldview and culture running broadly similar institutions, it won't be long before the nightmare on Wall Street is back. No wonder Citi never sleeps.
We can pay off the creditors of these behemoths, because, by design, we really have no choice. But there's no reason not to cut 'em up and shut 'em down after we do so. Let's bury 'em, Senator Shelby.
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posted by rokusan at 9:10 AM on March 11, 2009 [5 favorites]