Posted on 11/03/2009 3:37:10 PM PST by FromLori
The campaign to crack down on Wall Street bonuses was dealt a serious intellectual blow today when the winner of the 2006 Nobel prize in economics described attempts to blame misaligned compensation incentives for the financial crisis as "the most profound fallacy."
Edmund Phelps wrote a piece critical of neoclassical and Keynesian responses to the financial crisis for the Financial Times today. It's a great takedown of both schools from a Hayekian perspective. But it concludes by delivering a hammer blow to those who want to blame the financial disaster on bonuses.
From the FT:
The most profound fallacy is the newfangled idea that misalignment of incentives in banks caused the housing bubble – a bubble that, when it burst, shook the economy to its foundations. All can agree that increased lending and building ran into the awkward fact that costs increase when production is stepped up. On that account, prices sought a higher level. But that analysis does not capture the steep four-year climb in housing prices, which rose by more than 60 per cent.
To account for so large an increase, we have to recognise that expectations played a role. Speculators appear to have expected that housing prices would go sky-high, so prices took off and then went on climbing in anticipation that those high prices were getting closer. The banks, seeing the houses offered as collateral were worth more and more, responded by supplying an increasing flow of mortgage loans.
From this viewpoint, speculation drove the crisis. Misaligned incentives were not sufficient to do it – and not necessary either. Bubbles long predate bonuses. The crisis could have happened with a 1950s financial sector. The lesson the crisis teaches, though it is not yet grasped, is that there is no magic in the market: the
(Excerpt) Read more at businessinsider.com ...
Hardly, since the Nobel prize is a joke.
Democrats aren’t trying to blame the financial crisis on Wall Street compensation. It’s slight of hand for a gullible public. They punish a few fat cats in a tip of the hat to the populists out there while they are systematically undermining the economy. Surely a Nobel Prize winner in economics can spot that.
May not be the total cause, but it is a huge, glaringly red boil on the A$$ that is the financial world. The tip of the iceberg, so to speak.
If a mortgage broker writes a "loan" giving a $300,000 house to someone who makes $30,000/year, and if the house will ultimately sell for $180,000, that "loan" will swindle more than $120,000 out of people's pockets. If the system weren't set up to obfuscate fraud, nobody would buy the loan from the broker, so he'd have to eat $120,000. Serves him right. Fannie Mae and Freddie Mac, however, were set up to allow such loans to be "laundered" so that a loan worth less than $180,000 could be disguised as one worth over $300,000. Many people think that huge amounts of money were lost when the housing market crashed. Some money was lost then, but the vast majority of the losses had occurred long before.
Suppose one has a safe full of money. One never actually looks inside the safe, but one is confident the money is all there. Then one day, when it's necessary to actually withdraw the money, the safe is found to be empty. It may seem to the safe's owner as though all his money vanished when he opened the safe, but the reality is that it may have vanished long before. Key point: Delaying opening the safe may make it seem like one has money for longer, but if the money's gone, pretending it's still there won't change that. Pretending may allow one to stiff some other sucker with the losses, but it won't reduce the total lost. If anything, such pretending will give the thieves more time to make off with the loot.
Barney Frank and the Housing Fraud Gang caused this mess. What’s worse, it went viral across the globe putting the blame squarely on the shoulders of the U.S.
Not just in the financial world. Every little manager in every corporation who fudged the Quarter's to get the bonus, every Division VP who cut R&D and killed new products five years in the future to make each present year look good, for the bonuses and options, all contributed.
It was a universally corrupt culture of "Get Mine Now". And they did, and they got yours, too.
That's why I Shrugged.
You give to much credit to 2 groups, to wit: economists (and I have a BS in economics) and the nobel (I refuse to capitalize it) panel.
Well, I accuse a nobel prize winning economist of being unable to spot a transparent scam on the American (I still capitalize that) public and you say I’m giving him and the nobel committee too much credit? I basically called the nobel prize a joke and the economist in question a gullible fool. LOL!
I place the blame squarely on those folks who the big bonuses.
You are so right. I was gonna go there, but just didn’t have the energy.
No knowledgeable adult would claim that it did.
The bonuses, however, were and are a symptom of a very systemic pathology in the financial system.
Very obviously bonus payments had nothing to do with the current crisis. Way to miss the point that controlling executive pay is ONLY about socialist or rather, fascist control over capitalism by the socialists now running our nation.
The main cause of our current crisis, beyond the obvious symptom of debt, has been the idea of “too big to fail.” If we absolutly, completely and totally quit socializing losses, companies would be more ruthlessly careful with their losses and expeditures. As long as you know Uncle Sugar is going to pay for the losses if you are “too big to fail”, then you can give away obscene bonuses, eliminate reserves for bad times, incur huge losses. Who cares?
Too big to fail is killing us.
Really? You have read Phelp's work and can attest that it is a joke?
Don't confuse "peace" prizes with those given in substantive disciplines.
I beg to disagree: there have been plenty of statements that "excessive compensation" served as incentive for greater risk-taking on the part of Wall Street execs.
And, it is not only Democrats. I don't hear many Republicans defending contract law that governs executive compensation.
The "gullible public" appears to include great many people that view themselves as conservatives, including those on this forum.
You'll never hear what Phelps said from many Nobel laureates --- Joe Stiglitz, for instance.
Do you have any evidence that supports this view? Or is it just the envy of the "rich?"
The facts clearly contradict your statement. We had the same financial system for decades, and not only did it not experience deep crises --- it has helped to increase enormously our prosperity.
The only new element that was introduced was government regulation --- the 1998 Community Reinvestment Act that obligated banks to give bad loans.
"If a mortgage broker writes a "loan" giving a $300,000 house to someone who makes $30,000/year,"
Yep, that's what government made into a law.
Thank you. Sadly, very few people even among conservatives appear to know this fact.
BTTT
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