Thursday, January 14, 2010

Greed is like gravity 

Pedro Albuquerque is an economist at the University of Minnesota at Duluth and has a blog I've started to read regularly. A Brazilian, he's already been blogging for two years -- I feel bad I missed him before now. This piece is very interesting, on banker incentives:
A popular answer to the question [Why Are Bankers Reckless?] above based on political populism and inept moralism is: "because they're greedy." As an explanation it's as sophomoric as saying that airplanes crash because of the force of gravity, but apparently it gets some people elected.

University of Minnesota law professors Hill and Painter came with a better explanation based on sound economics: "because of wrong incentives created by poorly designed government regulations."
What the law professors propose is interesting -- a personal liability for bank debts created by paying in assessable stock. As Pedro would say, incentives matter, and making bank CEO income dependent on not taking too many risks would help. But I would wonder how to handle banks that gamble over time -- assessable stock would either have to be restricted to not sell for several years or you lose the stick that keeps the incentive in place. But which bankers would accept the loss of income from being assessed for bank mistakes that could happen after that banker moves on? I haven't read all of their paper, but it is an intriguing idea.

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