Whenever I read one of these stories about the financial markets lately (see also, Taibbi on the SEC), I start hearing Leonard Cohen.
The latest is an analyst from Moody’s talking about how its rating system was rotten to the core. (As John Cole puts it, “What are they alleging the ratings agencies did? Everything we already know but if you say it out loud you hate the free market and are a dirty socialist.”)
The primary conflict of interest at Moody’s is well known: The company is paid by the same “issuers” (banks and companies) whose securities it is supposed to objectively rate. This conflict pervades every aspect of Moody’s operations, Harrington says. It incentivizes everyone at the company, including analysts, to give Moody’s clients the ratings they want, lest the clients fire Moody’s and take their business to other ratings agencies.
Moody’s analysts whose conclusions prevent Moody’s clients from getting what they want, Harrington says, are viewed as “impeding deals” and, thus, harming Moody’s business. These analysts are often transferred, disciplined, “harassed,” or fired.
In short, Harrington describes a culture of conflict that is so pervasive that it often renders Moody’s ratings useless at best and harmful at worst.
I don’t know how you can look at our system and conclude that one’s compensation is primarily a function of the labor or other value they create. Seems more like there is a fire hose of money blasting out there, and your take depends on how successful you are at elbowing your way into close proximity. Maybe the hose is fed by created value, but the distribution system has little or nothing to do with the inputs.
A bit of Mr. Cohen:
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died
Do you read the Halfsigma blog? He is developing a thesis about “value creation” and “value transference” that you would buy into, I am sure.
There clearly are issues on Wall Street, as TARP so clearly showed, where folks are creating financial instruments that are cannot be understood by normal people and that have massive downside risk. These instruments are not regulate-able (how do you regulate what cannot be understood).
Some of these things just need to be outlawed altogether. In general, leverage needs to be removed from the system, so that the downside risks are somewhat mitigated.
All these things would tend to suppress incomes for the Wall Street elite.
My ego has grown to the point where I figure that, if I can’t understand it, it’s probably mostly b.s. Obviously, this is not going to be true 100%, but I’ll probably do myself more good than harm proceeding as if that’s true.
I hadn’t heard of the Halfsigma blog. I should check it out. Thanks.
When the economy’s a ballon, and you’re trying to keep it afloat, it takes a lot of hot air from cheerleaders.
My ego has grown to the point where I figure that, if I can’t understand it, it’s probably mostly b.s.
Not only that, but when you finally accept the fact that most experts are wrong, that most of what “everybody knows” is at best propaganda, that even “gold standard” science is littered with outright fraud… it should make you very humble.
It is from this humbleness that I have become more and more libertarian over time. If problems are so complex that nobody can even understand them, much less design a “program” to fix them, most of what government does is at best counterproductive, at worst a unmitigated disaster.
admitting that you don’t understand an issue is humble.
assuming that if you don’t understand it, nobody else does either… that’s the opposite of humility.
assuming that if you don’t understand it, nobody else does either… that’s the opposite of humility.
Who is assuming? The evidence shows that every single complex issue of our time has been misunderstood by “the experts”.
If complex issues are inherently unknowable, what is the prudent course of action? I submit that “do nothing” is the best course of action, public policy wise.
And if it makes you feel any better, I ask that question as someone who supported the Iraq war. I fully accept that “unintended consequences” were not considered in that one. If only the rest of society felt the same way about all the other issues we confront.