What's interesting about his analysis of the crash is that he squarely places the blame for the crazy risk-taking on the fact that the brokerages were corporations and not partnerships (starting at about 3:20):
Greenspan: When we began to see what was going on, you couldn't believe that there would be people that would be that disregarding of their own companies. How could you run, as you say, 30 times...
Stewart: Right. Thirty times on the leverage. Isn't it because they don't pay the penalty.
Greenspan: Yes.
Stewart: Isn't it the rewards that they were getting... the system was incentivized for these crazy short-term bursts of rewards.
Greenspan: Back in 1970, the New York Stock Exchange said that broker-dealers -- which is who all these people are -- could incorporate. Prior to then, they were all partnerships. And let me tell you something about a partnership: your partners don't let you take any risks that can affect them. And I remember they wouldn't lend you a nickel overnight.
And the system worked. You did not get anybody failing because the equity was protected. As soon as they started to go to corporations, they took risks for exactly the reason you suggest.Here we have one of the foremost proponents of capitalism telling us that corporations cannot be trusted to do the right thing, because the people who make the decisions have no skin in the game.
The entire purpose of a corporation is to shield officers from any economic responsibility for the decisions they make. And it's even worse than that: officers of major corporations have contracts with golden parachutes that guarantee them a huge payoff no matter how much harm they cause the company. They have no incentives to do the right thing, and there are no consequences for incompetence and malfeasance.
When conservatives talk about personal responsibility it's always in the context of keeping poor people off welfare and denying abortions to women. But when BP is fined for ecological catastrophes in the Gulf, or JPMorgan Chase is fined for its economic calamities, conservatives characterize these slaps on the hand as revenge and shakedowns.
When are we going to hold CEOs to the same standards as welfare moms?
2 comments:
Look at what you quoted again:
Stewart: Isn't it the rewards that they were getting... the system was incentivized for these crazy short-term bursts of rewards.
Greenspan: Back in 1970, the New York Stock Exchange said that broker-dealers -- which is who all these people are -- could incorporate. Prior to then, they were all partnerships. And let me tell you something about a partnership: your partners don't let you take any risks that can affect them. And I remember they wouldn't lend you a nickel overnight.
And the system worked. You did not get anybody failing because the equity was protected. As soon as they started to go to corporations, they took risks for exactly the reason you suggest.
That is exactly what we have been saying. Corporations can be expected to act in their own self interest. If the government encourages stupid behavior by removing the cost of failure, you get more stupid behavior. Period. And if the government mandates stupid behavior—such as requiring banks to give sub-prime loans—even smart companies who know better will engage in stupid behavior, because they are given no choice.
It's a stunning admission and perhaps the tide is finally turning. We need to move away from financialization and obsessiveness with inflation but that's not going to happen as long as we have crapola like this...
http://dealbook.nytimes.com/2013/10/28/house-set-to-vote-on-2-bills-is-seen-as-an-ally-of-wall-st/
Post a Comment