Monday, November 3, 2008

``They are only encouraging institutions to take more uncalculated risks.''

Via Yves Smith, this from Bloomberg:

"Nobel Winner Aumann Says Bernanke, Paulson Steps `Not Smart'

By Tal Barak and Alisa Odenheimer

"Nov. 2 (Bloomberg) -- Robert J. Aumann, the Israeli economist who won the 2005 Nobel Prize in economics, said the steps taken by Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson to save financial markets ``weren't smart.''

``The intervention by the regulators to save the U.S. economy will lead to further bankruptcies of banks and insurance companies,'' Aumann said at a rabbinical conference in Jerusalem yesterday. ``They are only encouraging institutions to take more uncalculated risks.''

The crisis in the financial markets was caused by the incentives provided to managers of banks and other financial institutions that caused them to act to their own benefit and not the banks', he said. Bonuses were given on the basis of loan sales, without considering who the borrowers were, he said."

Here's my comment:

Don said...

" Nov. 2 (Bloomberg) -- Robert J. Aumann, the Israeli economist who won the 2005 Nobel Prize in economics, said the steps taken by Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson to save financial markets ``weren't smart.''

``The intervention by the regulators to save the U.S. economy will lead to further bankruptcies of banks and insurance companies,'' Aumann said at a rabbinical conference in Jerusalem yesterday. ``They are only encouraging institutions to take more uncalculated risks.''

I'm not qualified, but here goes:

1) Moral hazard has to be enforced from the start, otherwise there's a cascading effect from letting the first few get passes. Actions have effects as do words.
2) Acting for your own benefit and not the firm's or customer's is a breach of fiduciary responsibility.
3) The situation's of the U.S. and Israel are not the same.

Don the libertarian Democrat

Now, I want to make my position clear. I agree that moral hazard is a serious issue. In my mind, it's the most important issue in the crisis, with fraud coming in second. But, in this situation, although the Fed and Treasury could have done a better job, they were correct in assessing the uselessness of moral hazard in this current situation finally. In my opinion, we'd have been dug too far done this time without government action, because the investors, the people with the money, would have take us there.

As to:
1) Uncalculated risks ( I say ignored )
2) Unwise incentives ( I say negligence, and, in some cases, fraud )
I agree with Aumann. But the idea that the government will not intervene in a crisis of this size in the U.S. as our government is now structured and committed, seems crazy to me, even though Aumann and Buiter seem to believe that.

2 comments:

Anonymous said...

Henry Paulson and Goldman Sachs:

Scattered from California to New York: The judgments from the Department of Labor, tax liens against 401-K plans, state tax liens, mechanics lien, judgments from other companies


Henry Paulson, 5 weeks before he became Treasury Secretary, got a FANNIE MAE/FREDDIE MAC 30 year fix mortgage/loan for his 82 year old mother in May 2005 for 5.37%, (below rate)

webofdeception.com

Donald Pretari said...

I take your point. Don