Nouriel Roubini (economist): Gordon Gekko Reborn

[steve2470]

http://www.project-syndicate.org/commentary/roubini28/English

2010-08-13


NEW YORK – In the 1987 film Wall Street, the character Gordon Gekko famously declared, “Greed is good.” His creed became the ethos of a decade of corporate and financial-sector excesses that ended in the late 1980’s collapse of the junk-bond market and the Savings & Loan crisis. Gekko himself was packed off to prison.

A generation later, the sequel to Wall Street – to be released next month – sees Gekko released from jail and returned to the financial world. His reappearance comes just as the credit bubble fueled by the sub-prime mortgage boom is about to burst, triggering the worst financial and economic crisis since the Great Depression.

The “Greed is good” mentality is a regular feature of financial crises. But were the traders and bankers of the sub-prime saga more greedy, arrogant, and immoral than the Gekkos of the 1980’s? Not really, because greed and amorality in financial markets have been common throughout the ages.

Teaching morality and values in business schools will not tame such behavior, but changing the incentives that reward short-term profits and lead bankers and traders to take excessive risks will. The bankers and traders of the latest crisis responded rationally to compensation and bonus schemes that allowed them to assume a lot of leverage and ensured large bonuses, but that were almost guaranteed to bankrupt a large number of financial institutions in the end.

A good article worth reading in its entirety, imho.

[DJ13]

1. K&R, but I disagree with one part

In particular, bonuses based on medium-term results of risky trades and investments must supplant bonuses based on short-term outcomes.

Bonuses based on stock performance needs to be totally eliminated, replaced with a salary only pay system.

All forms of incentives that encourage using questionable schemes to bolster stock valuations need to be ended if we want to decrease risk to our economy in the future.

Besides the risk, the bonus system currently in place (and the version Roubini suggests) has become a huge tax avoidance scheme, where the executives end up paying the current 15% capital gains rate instead of the current 35% income tax rate they would pay if they only received a salary without a bonus.

[steve2470]

2. kick for evening crowd nt