Paul Krugman is a brilliant man, he has a Nobel Prize in economics. I am not and I don't.
But Krugman is wrong on a very important point regarding the financial crisis. He thinks government should regulate bankers' pay (read it here).
He says the current method of compensation created an "incentive" for the abuses that brought the world's financial system nearly to its knees. Perhaps. It was certainly a factor. But there were many interacting factors, and we have to be careful about which we choose to "fix," and potential unintended consequences.
Compensation, or paychecks, is a perfect place to encourage the power of the market place, and absolutely the wrong place for government intervention.
What needs to be done is to foster consequences in the system, where firms that fail, and by definition those who lead them, are punished by the market, without threatening the entire system.
Generally this will mean making sure that bad decisions by one firm, say an AIG, don't threaten everyone's welfare. This can include limits on market share, capitalization requirements, reducing barriers to entry into a market so that competitors can flourish, etc. And, more than anything else, transparency.
It does not mean meddling directly in compensation issues. That is a guarantee of inefficiency, mediocre leadership, a lack of creativity and it crosses a line of how we want our financial system to function. Capitalism versus something else.
We don't want our government to govern companies directly, except to create a system that preserves itself and its function to society while allowing those companies to bring efficiencies, offer new products, and to fail when their decisions are faulty.
A fine distinction, perhaps, but an important one.
Showing posts with label economic crisis. Show all posts
Showing posts with label economic crisis. Show all posts
Friday, June 19, 2009
Sunday, March 1, 2009
Beware the knives
Liberals have their knives out for fat cat bankers. They should put them away and take a deep breath.
The fact is, there are very few people capable of running banks, large or small, and most of them already are. There is no benefit to turning banks over to bureaucrats, or destroying them and the value of stock often owned by pensions, state retirement accounts, and people who worked hard their whole life.
There are many causes to the credit crisis, and banks are certainly at the center of the storm. That does not mean that individual bankers or banks are villains. Much of the blame goes to Phil Graham and a lot of misguided Democrats who changed the rules and allowed banks to invest in riskier enterprises and give loans to people who did not deserve them.
A whole generation forgot the lesson of the Great Depression and lived beyond their means. We are all at fault, and it doesn't help to point fingers at who might be more at fault than others.
So what to do now? Hidden beneath the headlines is the fact that many "risky" banks are actually making money. They look bad on paper because the value of the assets they hold is unknown. Since the markets have frozen up, it is hard to value property, but the regulators are forcing a "mark to market" strategy that is forcing banks to revalue property at low, low levels.
Because of this, banks are flirting with capitalization ratios that make it appear they are in worse shape than they are, if the same assets were valued over a longer term.
The banks need time, and we all need some sort of confidence in our real estate markets, which requires banks to be able to lend.
First, according to many, we need to pull our banks back from the brink. The best way to do this is to follow the advice of commentator Jim Cramer and implement the same kind of program of "forbearance" that saved the S&L situation of the 1980s. Once there is a market for real estate, the banks can mark the value of their assets in prudent ways, or dispose of them. Until then, the exercise is not only futile, but damaging.
Secondly, the government needs to provide guaranteed home refinancing for everybody at 4%. This will start the process of reducing inventory overhang, and doesn't punish those who bought wisely.
But the current mob mentality of the left, to cut off the heads of bankers and destroy the banks they lead, is horrifically irresponsible. It is the banking system that government should reform, not banks. That is done with laws, not seizure. Once prudent rules are back in place, and the market stabilizes, we want bankers running our banks, and we need our banks to succeed.
Or else the crisis is just beginning, and will be made worse by the Left's lack of understanding and disdain for money.
The fact is, there are very few people capable of running banks, large or small, and most of them already are. There is no benefit to turning banks over to bureaucrats, or destroying them and the value of stock often owned by pensions, state retirement accounts, and people who worked hard their whole life.
There are many causes to the credit crisis, and banks are certainly at the center of the storm. That does not mean that individual bankers or banks are villains. Much of the blame goes to Phil Graham and a lot of misguided Democrats who changed the rules and allowed banks to invest in riskier enterprises and give loans to people who did not deserve them.
A whole generation forgot the lesson of the Great Depression and lived beyond their means. We are all at fault, and it doesn't help to point fingers at who might be more at fault than others.
So what to do now? Hidden beneath the headlines is the fact that many "risky" banks are actually making money. They look bad on paper because the value of the assets they hold is unknown. Since the markets have frozen up, it is hard to value property, but the regulators are forcing a "mark to market" strategy that is forcing banks to revalue property at low, low levels.
Because of this, banks are flirting with capitalization ratios that make it appear they are in worse shape than they are, if the same assets were valued over a longer term.
The banks need time, and we all need some sort of confidence in our real estate markets, which requires banks to be able to lend.
First, according to many, we need to pull our banks back from the brink. The best way to do this is to follow the advice of commentator Jim Cramer and implement the same kind of program of "forbearance" that saved the S&L situation of the 1980s. Once there is a market for real estate, the banks can mark the value of their assets in prudent ways, or dispose of them. Until then, the exercise is not only futile, but damaging.
Secondly, the government needs to provide guaranteed home refinancing for everybody at 4%. This will start the process of reducing inventory overhang, and doesn't punish those who bought wisely.
But the current mob mentality of the left, to cut off the heads of bankers and destroy the banks they lead, is horrifically irresponsible. It is the banking system that government should reform, not banks. That is done with laws, not seizure. Once prudent rules are back in place, and the market stabilizes, we want bankers running our banks, and we need our banks to succeed.
Or else the crisis is just beginning, and will be made worse by the Left's lack of understanding and disdain for money.
Saturday, February 7, 2009
The left doesn't get it
Okay, it is not like we have to "prove" the left doesn't like money and doesn't understand it. By now that should be common knowledge. But egregious examples still need to be highlighted.
Today's New York Times (read it here) calls for adding money to the stimulus bill to build 1.5 million units of affordable housing. This will house poor people and create jobs, according to the Times.
Ladies and gentlemen: is there anybody out there who doesn't know this crisis was sparked by overbuilding? That the markets are flooded with housing? That there are empty houses and apartments and condos all over this nation? That building more units makes the problem worse, not better?
The same issue of the Times has a couple of good articles on the stimulus plan and the politics. But today's editorial makes it so blindingly obvious that the left will never cease doing the wrong things for all the right reasons.
Today's New York Times (read it here) calls for adding money to the stimulus bill to build 1.5 million units of affordable housing. This will house poor people and create jobs, according to the Times.
Ladies and gentlemen: is there anybody out there who doesn't know this crisis was sparked by overbuilding? That the markets are flooded with housing? That there are empty houses and apartments and condos all over this nation? That building more units makes the problem worse, not better?
The same issue of the Times has a couple of good articles on the stimulus plan and the politics. But today's editorial makes it so blindingly obvious that the left will never cease doing the wrong things for all the right reasons.
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