Wednesday, October 29, 2008

That's all you got, Professor?

Spot told you, boys and girls, that we were going to have some fun with this one. You'll remember that Spot has been asking, inter alia, King Banaian for a comment about Alan Greenspan's remarks before a U.S. House oversight panel.

More like goading, don't you think, Spot?

Whatever. Anyway, we did get something yesterday: Markets boo-boo, and so does government.

The professor is apparently too stricken to formulate his own response, so he quotes one:

Alan Greenspan thought that banks would never put themselves in a position where they might go bankrupt. Investment houses would never take on too much risk. After all, that could mean disaster and the threat of disaster should encourage prudence. And yet, many banks and investment houses evidently did take on too much risk. The incentives failed.

I too am surprised at how imprudent they were. Did they miscalculate? Trust the ratings agencies too much? Misread the systemic risk if other firms failed? Did they fail to appreciate the bite of mark-to-market accounting rules that the government required? Or perhaps, this whole incentive thing that is at the root of capitalism, the profit and loss system that incentivizes firms is overrated. People are impulsive and make systematic errors[.] [italics are Spot's]

Meanwhile, I keep coming back to this quote:

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."
And the alternative? What should protect the shareholders? The altruism of regulators?

This is the closest that the professor has probably ever come to an existential crisis. Can't you see the professor out late at night on the deserted streets of St. Cloud, walking his dog Milton, and muttering "My Precious. My Precious Markets!" Tragic, really.

It is quite amusing to Spot that the professor can't say, as he does in his post title, that "markets boo-boo" without immediately adding "and so does government." Nah nah.

Spot is reminded of the Fonz trying to say that he was wwrroooooooooonnngg.

But never mind "protecting the shareholders" for a moment. What about all the counter parties and the public? By adopting the quoted material, the professor seems to be saying that the only parties who are stakeholders here are the shareholders. But that is manifestly not so.

Remember, banks and other financial institutions have separate legal existence, limited liability for the shareholders, insurance for their depositers, and access to public capital markets. They exist and function only because of the government.

Doesn't the government do that just so the shareholders can get rich, Spotty?

Well grasshopper, that's what Uncle Alan and the professor apparently believe. But it should be obvious that many more parties than just the shareholders benefit from a stable banking system. It is these parties that Spot hopes that Henry Paulson is thinking about in this bailout.

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