Krugman is wrong

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.

Financial wisdom

For those of you looking above the trench line, we wrote something last August (read it here) that still applies.

Not that we are all that prescient. This morning, we read something from Todd Harrison that really struck home:

"...There are few opportunities in our lives to literally watch history tick before our eyes. These are the times our grandchildren will study, like we study the Great Depression, puzzling over the bizarre circumstances that came together to form this perfect storm.

"What is most misunderstood is that this not only a financial crossroads, but a societal one as well. The repercussions of government policy and our individual actions will echo loudly throughout future generations.

"We have a choice to make. We can face our mistakes with bravery, accepting consequences as they come, confident we can meet the challenge while rebuilding a more sustainable structure; or we can continue to let fear and greed drag us along the road to ruin.

"The former, while more challenging, is the path of perseverance. It is the only noble road, one that accepts responsibility for our actions and paves the way to better days.

"They say admitting you have a problem is the first step towards solving it. It’s about time that we, the people, practice what we preach."

(Click here for full article).