On Wed, 11 Feb 2009, Doug Henwood wrote:
>> One, besides the pleasure (which I would feel as well as anyone) what
>> exactly do we get of kicking out management? Wouldn't we simply have
>> to hire new bankers who we would then have to get up to speed? Isn't
>> it more a question of re-regulating bankers, whoever they are?
>
> There should be consequences for failure. Future execs should know that
> if they fuck up bigtime, no biscuit for them.
Okay, so you're saying, besides the pure pleasure of kicking them hard (which again, I share[FN1]) it's a moral hazard justification?
My question is, isn't that kind of redundant and/or useless? Because a negative incentive like that would only makes sense if we're going to give them the kind of freedom from regulation where they could do this again. But it seems to me, the only way to stop this sort of thing is to not trust to incentives for good behavior (the Greenspan approach) and erect, as you said, a tightly regulated and hugely more transparent banking system, that makes much of this behavior illegal and enforces it.
And in a system like that, a moral hazard incentive would be besides that point. The incentive not to get immediately fired and/or go to jail would be the incentive going forward for avoiding such behavior.
On the flipside, without this sort of wholesale change in the strength and extent of regulation, this moral hazard incentive strikes me as a bulwark of very weak reeds against this happening again. Especially if we don't change the incentive of the bonus pay structure, which is a separate issue.
For these reasons, moral hazard punishment seems like a wheel that one way or another won't turn the mechanism.
>> Secondly, if we nationalize the two weakest banks (BofA and Citi) right
>> now, is there no chance that will cause a rapid meltdown in the worth
>> of the banks we don't nationalize? (Thus getting nationalization off
>> to a horrid-looking start?) Is this something we don't have to worry
>> about?
>
> Why would nationalizing the weak cause the meltdown of the not-so-weak?
Because nationalization would wipe out all the equity holders and all or most of the unsecured creditors. In which case at least some people who hold bank stock or bonds in the other banks would fear it happening to them and would dump them. Triggering a kind of self-fulfilling run on the banks of the sort we saw in October. This is not a possibility? There's a way to ward it off?
In seems one advantage Sweden was that nationalizing five banks meant nationalizing the entire banking system -- all equity and unsecured debtholders were hit at once. Nationalizing part of it seems more difficult precisely because it could incite these sort of runs. But maybe there is data from history that shows this doesn't happen or doesn't matter?
Michael ------------
FN: Personally, I'm partial to the "Wicker Man" variant:
http://krugman.blogs.nytimes.com/2009/01/17/an-alternative-economic-strategy/