Saturday, November 24, 2007

Reading: Krugman on banking's grand illusion

Paul Krugman reviews the current and impending damage to be done by the collapse of the "sub-prime" market and concludes that the danger is our inability to distinguish between what seems and what is:
How did things go so wrong?

Part of the answer is that people who should have been alert to the dangers, and taken precautionary measures, instead blithely assured Americans that everything was fine, and even encouraged them to take out risky mortgages. Yes, Alan Greenspan, that means you.

But another part of the answer lies in what hasn’t happened to the men on that Fortune cover — namely, they haven’t been forced to give back any of the huge paychecks they received before the folly of their decisions became apparent.[…]

Executives are lavishly rewarded if the companies they run seem successful: last year the chief executives of Merrill and Citigroup were paid $48 million and $25.6 million, respectively.

But if the success turns out to have been an illusion — well, they still get to keep the money. Heads they win, tails we lose.

The increasingly regulatory- and oversight-averse banking industry created the appearance of being well-nourished by cannibalizing itself, with predictable results.

Krugman's column is going onto the Readings list in the sidebar.

No comments: