naked capitalism

craazyman says:

Regarding former Citibank head Mr. Reed’s apology:

“We learn from our mistakes,” said Reed, who wrote an Oct. 21 letter to the editor of the New York Times endorsing a division of banking activities. “When you’re running a company you do what you think is right for the stockholders. Right now I’m looking at this as a citizen.”

One of the sad lessons from the crisis, which should have been apparent in advance, is that when companies run amok pursuing their own self-interest it produces externalities which are often more costly to society than they are a source of profits to the companies themselves.

In other words, social welfare is reduced on balance, not increased. It’s the premise that social welfare is increased that is often the justification for such strategies — as we have recently seen in the sermons to mammon issuing forth from England’s pews.

Institutional investors pay a high price for these externalities in the form of longer-term portfolio losses. The directors, trustees and other fiduciaries of institutional portfolios should be some of the most vocal critics of the financial industry, and they should manifest this dissatisfaction through aggressive shareholder campaigns to reign in the industry. Why they are so silent is almost a mystery — although somnabulence, cynical self-interert and complacency know no limit in some instances.

Don the libertarian Democrat says:

Spot On Paper!

http://www.bankofengland.co.uk/publications/speeches/2009/speech409.pdf

BANKING ON THE STATE
Piergiorgio Alessandri
&
Andrew G Haldane*
Bank of England
November 2009

“So far, so bad. But it is about to get worse, for this tells only half the story. This is a
repeated game. State support stokes future risk-taking incentives, as owners of banks
adapt their strategies to maximise expected profits. So it was in the run-up to the
present crisis. In particular, five such strategies were clearly in evidence:”

“The “St Petersburg paradox” explains how a gambling strategy which starts small but
then doubles-up in the event of a loss can yield positive (indeed, potentially infinite)
expected returns. Provided, that is, the gambler has the resources to double-up in the
face of a losing streak. The St Petersburg lottery has many similarities with the game
played between the state and the banks over the past century or so. The banks have
repeatedly doubled-up. And the state has underwritten any losing streak. Clearer
practical examples of a policy time-consistency problem are unlikely to exist.”

“Taken together, this evidence paints a consistent picture: a progressive rise in
banking risk and an accompanying widening and deepening of the state safety net.
There is a ratchet. This ratchet is evidence of a policy time-consistency problem.”

“A framework for the banking safety net: Even with systemic risk reduced, the
state is unlikely to be able credibly to stand aside when future tail risks
eventuate, as they are sure to do. Some bulwark is needed. As in other public
policy arena, a pre-defined and transparent regime can help reinforce the
credibility of ex-post actions, serving as a pre-commitment device.”

rawr says:

You weren’t kidding about the Endless Summers article. I managed to finish the second paragraph and I couldn’t take it anymore when I read this:

“No less an authority on presidential power than Henry Kissinger once told Tim Geithner, now the Treasury secretary, that Summers should have a permanent job at the White House, solely to sort out for the president—any president—the good ideas on economic policy from the dumb ones.”

RFK Action Front says:

Thanks for the link Yves!

Steve2241’s comment (the first one on this post) is really intriguing too. By analogy the near collapse of the market this past year was an “existential threat” to financial institutions that triggered a freeze response (much like a gazelle in the jaws of a cheetah). Now a year later, the immediate threat seems to have passed but financial institutions are almost in a PTSD dissociative state reliving the threat as if it is still present (and not lending or doing the sorts of things healthy financial institutions are normally supposed to do). Now of course, maybe that’s putting too fine a point on it, the analogy may not hold at all. But it is interesting to think about the ways in which large institutions sometimes mirror traits we see in individuals.

The bunny photo is fantastic too!