Thou shall not crucify mankind on a cross of financial innovation

I’d been meaning to use that line for a while, and Yves Smith of Naked Capitalism provides a perfect opening this morning, with a nice long post that I hope he won’t mind my cannibalizing.  Smith argues that many of the recent Wall Street bonuses are not just excessive, but a form of looting:

“It was looting, and it is high time the media starts describing it in those terms.”

While most of us might picture a looter as some guy breaking into a store during a blackout and stealing TV’s, Smith is serious.  He rests his definition on a 1994 NBER paper by economics Nobelist George Akerlof and David Romer, which concludes:

“Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.”

Exactly, says Smith, who says the investment bank executives did exactly that:  “pay themselves more than their firms are worth and then default on their debt obligations.”  He laments that nobody in the media has put it this bluntly, let alone called it looting.  More often it gets ignored, or seen as an inevitable by-product of that almighty engine of progress, financial innovation.

I agree with Dean Baker’s repeated argument that the U.S. financial sector has been bloated beyond rationality and that the economy would function better with a smaller, simpler financial sector that didn’t try to peddle so many dubious-to-worthless products to households, consumers, institutions, etc.   Smith, impatient with those who “are still urging that we not squelch ‘financial innovation’,” offers up a gem of a quote from Martin Mayer, who called financial innovation

“… a way to find new technology to do what has been forbidden with the old technology….Innovation allows you to go back to some scam that was prohibited under the old regime.”

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One Response to “Thou shall not crucify mankind on a cross of financial innovation”

  1. The big banks are still socializing the losses « Blogging Through the Wreckage Says:

    […] their shareholders and their executives and traders. There’s a technical term for it: looting. GA_googleAddAttr("AdOpt", "1"); GA_googleAddAttr("Origin", "other"); […]

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