[Update] Rot at the core: Paul Volker notes that something is wrong with incentives, but can`t quite put his finger on it; guess that means MORE regulation
[Update: Links fixed]
Bloomberg reported on March 6 that Former Fed Chairman Paul Volker, in proposals to the Obama administration regarding financial regulatory reform that were included in a January report he wrote with the “Group of 30”, commented that:
the financial industry’s problems stem from larger issues. “I don’t think this is just a technical problem, it’s a societal problem,” he said. He cited bankers on Wall Street receiving multimillion-dollar bonuses for engineering failed mergers.
“There’s something wrong with the system,” Volcker said. “What are the incentives, what’s going on here?”
But it seems that Volker can`t quite put his finger on the core of the moral hazard problem. Do any of my readers have any ideas?
Categories: limited liability, moral hazard, Volker
Brannon, many thanks for commenting and pointing out the link problem, which I have fixed.
Volker”s no longer a member of the Fed of course, so is unlikely to see the Fed as part of the problem (though he might think that Greenspan and Bernanke have led it astray). But it’s certainly a good thing that he is helping to raise attention to a general problem of misaligned incentives.
While you are right that goverment attracts rent-seekers, there’s little new in that. My point is that rent-seeking has acccerlated along with the rise of large corporations, which have at their core the state grant of limited liability, which both incentivizes managers to undertake activities that may be socially hazardous (but for which shareholders have no residual liability; leading to increasing regulation), which has lessened shareholder interests in controlling managers, which has increased management’s freedom and moral hazard.
At least in the financial sector, the rot is pervasive and the system falling apart.
Your link is broken. As for Mr. Volker not knowing what is going on — I doubt that. He stands to profit for interest made by the Fed, does he not? And as for the “moral hazard problem” — any company that can turn to the tax payers for financial support when their merger fails might as well try it.