I’m sad to report that I think that Megan McArdle is wrong in her assessment of the masters of the universe who’ve plunged the world’s financial system into crisis:
So I’m not sure how much extra incentive mileage we’d get out of taking all, rather than merely most, of the fortunes of CEOs who piloted their banks into the financial reefs. Some, clearly, because everything matters on the margin. But enough to prevent the financial crisis? I doubt it. CEOs, like the rest of us, are keenly interested in not getting fired and losing most of their stuff, which is the logical outcome of putting your bank into liquidation. Note that this does not settle the question of whether we should take the rest of their money–justice might demand confiscation even if prudence doesn’t. It simply tells us on which grounds we ought to decide that question.
The problem is that things are very different in the upper echelons of top companies than they are down in the trenches. If most poor schmoes working for big companies were to lose billions of their companies’ money and throw the entire system into a cocked hat, not only would they get fired but they would find it pretty darned hard to get a decent job again.
Not so the guys at the top. The history of Fortune 500 companies is positively crowded with stories of top execs who gone from company to company wreaking havoc whereever they’ve gone. The general sentiment among boards of directors seems to be that anybody can make a mistake and people who’ve had the responsibility of the top slot before even when they’ve failed are a better risk than those who’ve never had that experience at all.
I really don’t know what to do about the situation. I’m not sure that Arnold Kling’s solution, criminalizing salesmanship,
I look at this crisis as a mountain of regulatory arbitrage. The brightest financial minds focused on ways to pile risks onto banks without regulators being able to see it.
If we are going to have a regulated, guaranteed financial sector (such as banks with insured deposits), then that sort of behavior needs to be criminalized. I would suggest creating a statute that makes conspiracy to mislead bank regulators a crime punishable be long imprisonment. Define the terms in the statute in such a way so as to make prosecution easy–don’t create standards of proof so difficult that a good lawyer can get a guilty defendant off. Such a statute would really, really, raise the risk of setting up schemes to privatize profits while socializing losses.
is the right one, either. For one thing I’m not sure that these guys were actually smart enough to know what they were doing. Besides our legal system is rigged so that the guy who can hire the fastest gun wins. One thing about having billions is that you can always hire the fastest gun.
I’m pretty sure that my preferred solution, reducing the penalty for assault on these jerks to a misdemeanor punishable by a $5 fine, wouldn’t fly, either.
Most of all I think we need to drop the moral outrage and look solely at the pragmatics of the situation. It may be that to keep the system afloat we’re going to allow some good, prudent people who’ve done nothing wrong to be punished while some guys who’ve been really, really bad and stupid prosper.
Unfortunately, making the world just is beyond our reach. The most we can hope for is to make it a little better than it might otherwise be.
