Moral Purity vs Economic Incentives

A comment from Metafilter:

Give me a break.The housing crash can be explained entirely in terms of incentives that were completely out of whack. Implying that we as a society would have avoided disaster if only we still had humility and moral fiber is shrill and useless, and will not help us fix this crisis or prevent the next one. When the incentives are screwed up, individual people will make decisions that harm everyone else, without malicious intent. The way to prevent the next crash isnt to bewail the collapse of sanity, but rather to change the incentives. What incentives am I talking about?

1. Mortgage brokers that made loans they knew would go bad, because they could just sell them to Fannie, Freddie, or private banks and take the commission. Fannie and Freddie are backed by the government, so why worry about one loan that might go bad? Better to put someone in a home and get a nice commission than turn them down and make no money.

2. Investment banks that could bet against their own investors – see Goldman Sachs latest debacle with mortgage-backed securities. The guy in one part of the company betting against the securities gets a nice bonus even if he makes the salesman in the other part of the company lose his bonus, and even though the net result for the economy was lost wealth.

3. Government regulators that are paid by the companies they regulate. Dont bite the hand that feeds you!

4. Debt rating agencies that are paid by the companies whose securities they rate. Again, dont bite the hand that feeds you! The crash did not just “happen”; it was inevitable with those incentives in place.

via Strategic Default and The Unceremonious Fall From Entitlement






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