OK, compensation caused all the problems

Posted by Marc Hodak on September 24, 2009 under Politics | Be the First to Comment

That’s the convenient consensus of political leaders, anyway.  Convenient because then they don’t have to deal with the possibility that government manipulation of the cost of capital might have had a meaningful impact on the capital markets.  They can pretend that government guarantee of mortgage loans didn’t materially goose the mortgage market.  They can blithely conclude that 70,000 pages of new financial services regulation since 2000 was just not enough.  Nope.  It was the compensation of managers and traders.  Yeah, that’s it.

What, a scientist might ask, was different about banking compensation in recent years that would have caused this particular crisis in 2008 instead of, say, any time in the last couple of decades that bankers were being paid obscene bonuses under supposedly perverse incentives?  The best answer to that question would be…stepped up government manipulation of the capital and mortgage markets.

The government changed the game with artificially low rates, and artificially high mortgage profits, and artificial capital market complexity born of mind-numbing red tape.  The bettors were always at the table.  The game was changed on them.

So, if you’re a government official, all this of course means that we have to change the way people bet so we can keep the silly game we created.  We can keep absurdly low interest rates that are divorced from the reality of our underlying cost of capital.  We can keep Fannie and Freddie, and now the Fed, propping up housing markets because high food costs, high energy costs, or high costs of anything else are bad, but high housing costs are good.  Then we can expand regulation of the financial sector because an extra 10,000 pages is sure to achieve the Nirvana that the prior 70,000 pages could not.

But certain people–rich people–will be making less money.  Now, wouldn’t that make it all better?