Interesting article on why Wall St. crashed
DGDevin
night I was looking up articles related to his admission that he'd got it
wrong, and found this. It's an interesting take on why it's a huge mistake
to assume that corporations can be counted on to protect the system out of
self-interest.
http://www.themonthly.com.au/nation-reviewed-noel-pearson-comment-corporate-fallacy-1785?page=0%2C0
The Monthly � July 2009, No. 47 �
Comment
The Corporate Fallacy
Noel Pearson
A few prescient people - too few of them economists - are entitled to say of
the current economic crisis, "I told you so." One is Ian Macfarlane, the
former governor of the Reserve Bank of Australia, who warned in October
1998, at an economic summit in Singapore, that "more and more people are
asking whether the international financial system as it has operated for
most of the 1990s is basically unstable. By now, I think the majority of
observers have come to the conclusion that it is."
In the same month, Macfarlane told an international conference of banking
supervisors in Sydney that it was "simplistic to insist on the totally free
movement of capital in all countries and in all circumstances" and said, "We
need to devise a system for maximising the benefits to be gained from
international capital while limiting the risks." A month later, he told the
Committee for the Economic Development of Australia that "the intellectual
underpinning of the free market position in relation to asset price
determination - the Efficient Markets Hypothesis - is very weak. In all the
exchange-rate tests of which I am aware, the hypothesis has been
contradicted by the facts."
Yet, notwithstanding the worries of iconoclastic bankers such as Macfarlane,
the world continued to dance to the tune of the financial engineers even as
many of the dancers felt a rising sense of foreboding. Chuck Prince, the
former chairman and CEO of Citigroup, said in July 2007: "When the music
stops, in terms of liquidity, things will get complicated. But as long as
the music is playing, you've got to get up and dance. We're still dancing."
Things will get complicated. Nothing illustrates more saliently the
condition of modern managerial elites: power without responsibility. With
his statement, Prince was making a pre-emptive case for being excused from
responsibility, on the grounds that the financial system in which his bank
was a participant gave it no option, if it wanted to maintain its market
share, but to continue contributing to the inflation of a bubble that would
inevitably burst. No matter that this perverse system was one that Citigroup
had helped to create, and boosted and defended. Or that Citigroup's managers
were by no means powerless to behave responsibly, not only towards their
customers and those with whom they did business, who would be harmed by what
they did, but in relation to the viability of their own institution.
In all of this, no one has suffered a reversal in credibility to equal that
of Alan Greenspan, the former chairman of the US Federal Reserve.
Nevertheless, it is from the intense perspectives of key protagonists, such
as Prince and Greenspan, that some of the sharpest insights into the
economic crisis are to be gleaned. In his testimony to the Congressional
Committee of Government Oversight and Reform, given last October, Greenspan
expressed dismay at the failure of what he called "counter-party
surveillance":
"those of us who have looked to the self-interest of lending institutions to
protect shareholder's equity (myself especially) are in a state of shocked
disbelief. Such counter-party surveillance is a central pillar of our
financial markets' state of balance. If it fails, as occurred this year,
market stability is undermined. What went wrong with global economic
policies that had worked so effectively for nearly four decades?"
Greenspan's faith in the financial markets rested on this concept of
counter-party surveillance: the self-interested monitoring by market
participants of one another. Participants would automatically and naturally
protect their own positions and manage their exposure to risk when dealing
with counter-parties. This, he believed, was a stronger mechanism for
preserving the balance of the financial system than any form of external
regulation.
Belief in counter-party surveillance is justified, however, only if the
self-interest of participants is indeed driving risk management. Yet it wasn't.
In the financial crisis, a clear breakdown in such surveillance occurred,
which left Greenspan utterly confounded, as he elaborated following his
Congressional testimony:
"I made a mistake in presuming that the self-interest of organizations,
specifically banks and others, were such that they were best capable of
protecting their own shareholders and the equity in the firms. And it's been
my experience having worked both as a regulator for 18 years and similar
quantities in the private sector, especially ten years at a major
international bank, that the loan officers of those institutions knew far
more about the risks involved and the people to whom they lent money than I
saw even our best regulators at the Fed capable of doing. So the problem
here is something which looked to be a very solid edifice and indeed a
critical pillar to market competition and free markets did break down. And I
think that, as I said, shocked me. I still do not fully understand why it
happened and obviously to the extent that I figure out where it happened and
why I will change my views. If the facts change, I will change."
The cause of Greenspan's bewilderment is so obvious that he, the most
brilliant of rationalists, cannot see it: he had assigned self-interest to
corporations, but self-interest can only be held by people.
What Greenspan calls "the self-interest of organizations" is merely the
expression of the range of human interests contained within an organisation.
Greenspan's mistake I propose to call the anthropomorphic fallacy: the
fallacy of ascribing human traits to a non-human entity - including that
most fundamental of human drives, self-interest. In fact, the artificial
creature called the corporation only superficially exhibits a collective
self-interest. The collective interest apparently represented by a
corporation may be aligned with the self-interests of the individuals who
make it up, or it may not. Indeed, the interests of the individuals and
groups that compose the corporation may be at odds in crucial ways.
In the modern corporation, the interests of the various parties - managers,
talented and profitable risk-takers, staff and stockholders - are not
unitary. Some pursue their interest in speculation on stock prices, some in
dividends from profits. Some interests are long-term, others short. Some see
themselves in a capitalist marketplace, while others see themselves in a
casino.
The question, therefore, is who gets to determine the interest of the
institution. In the modern corporation, it is the management. But the
self-interest of managers, who have no significant ownership of the
corporation, is disconnected from the interests of the other parties with a
stake in the corporation's fortune and fate.
Compare giant publicly listed corporations, with their numerous anonymous
stockholders, including the superannuation fund managers responsible for the
investments of millions on behalf of their policyholders, to privately owned
corporations or listed corporations with powerful individual shareholders.
There is no way that a Rupert Murdoch would allow the fate of News
Corporation to be determined by the self-interest of a manager like Chuck
Prince.
When you accept that corporations do not have a unitary self-interest, it is
plain that fundamental reform of the structure of corporations - both in
their governance and the relationship between owners and management - is
imperative.
In an earlier era of capitalist corporations, the alignment of the interests
of owners and managers was closer; corporate interest was assumed to be
unitary. But the rise of large, multi-shareholder corporations and the
decline of dominant individual shareholders, together with greater
deregulation of financial institutions, created incentives for managers to
lean towards short-term considerations and take greater risks. Fewer and
fewer incentives supported the long-term. Just because many of the financial
instruments that were traded involved long-run returns, those responsible
for creating and trading these instruments got their rewards in the short
run. Liabilities could be shoved into the future, while profit(eering) could
be brought forward.
It was for good reason that collapse was averted following the Panic of 1907
by the actions of the financier JP Morgan, in the absence of any
governmental mechanism to rescue the financial system. It was Morgan's
self-interest in his own organisation and the wealth that was tied up in it
that drove him to provide a guarantee to the banks - in the form of a $100
million gold loan - in order to avert a general collapse. (It is said that
during this period the four words that most terrified the banking community
were: What if he dies?) In those days, owner-oligarchs concerned themselves
with the long-term survival of their organisations, whereas today the
manager-oligarchs' self-interest is short-term. And so we have a long list
of venerable institutions that have fallen over (or should have fallen over,
had they not been heavily transfused with the blood of taxpayers) like so
many ten-pins.
And yet Greenspan could not see the answer to his conundrum. Instead,
reliant as he is on the mathematical models of risk management, he went on
to say:
"It was the failure to properly price such risky assets that precipitated
the crisis. In recent decades, a vast risk-management and pricing system has
evolved, combining the best insights of mathematicians and finance experts
supported by major advances in computer and communications technology. A
Nobel Prize was awarded for the discovery of the pricing model that
underpins much of the advance in derivatives markets. This modern
risk-management paradigm held sway for decades. The whole intellectual
edifice, however, collapsed in the summer of last year because the data
inputted into the risk-management models generally covered only the past two
decades, a period of euphoria. Had instead the models been fitted more
appropriately to historic periods of stress, capital requirements would have
been much higher and the financial world would be in far better shape today,
in my judgment."
Greenspan claims it was not the mathematical model that was wrong, it was
the numbers they plugged into it.
Professor Lucian Bebchuk from the Harvard Law School reinforces the
importance of distinguishing between "controlled companies", which have a
controlling shareholder, and "widely held companies", which lack such a
figure. In controlled companies, the problem of governance centres on
opportunism by the controlling shareholder. In widely held companies, it
centres on opportunism by managers, who exercise de facto control. Bebchuk
argues that reforms to improve corporate governance and protect investors
must take into account the fundamental differences between controlled and
widely held companies - that "one size fits both" reforms will not work.
Since the nineteenth century, when corporations were first anthropomorphised
and granted the legal personality of human beings, we have come to assume
that they possess the kind of self-interest that Alan Greenspan was banking
on, the kind that would ensure they would not risk their own extinction as
corporate entities. But a corporation is merely a collection of contracts
between humans, whose individual interests are the true self-interests
within the corporation. And in recent times, the decisive interests of the
managers have become disconnected from the interests of the company and its
shareholders.
DGDevin
>> After seeing Alan Greenspan eating crow before Congress on Frontline
>> last night I was looking up articles related to his admission that
>> he'd got it wrong, and found this. It's an interesting take on why
>> it's a huge mistake to assume that corporations can be counted on to
>> protect the system out of self-interest.
>
>
> Problem is that the Fed still gets it wrong.
>
> The dollar is pushing new lows. That is inflation. Inflation is the
> next crisis for holders of US dollars.
I told them and told them, don't give the job to Bernanke, there's this guy
named Donny in Florida who has it *all* figured out....
DGDevin
>>> Problem is that the Fed still gets it wrong.
>>>
>>> The dollar is pushing new lows. That is inflation. Inflation is
>>> the next crisis for holders of US dollars.
>>
>> I told them and told them, don't give the job to Bernanke, there's
>> this guy named Donny in Florida who has it *all* figured out....
>
>
> I'm out of Florida until the end of hurricanse season. I have been
> retired for over ten years and I turn 41 next week.
And you're a cowboy and an astronaut and you're weighing offers to be
Commissioner of Major League Baseball and CIA director--you might do both to
keep from being bored since being a globe-trotting playboy, film-producer
and Formula One racer is getting a bit stale.
x...@xxx.com
>
>
>
> -= http://www.flickr.com/photos/rosepetal236/ =-
Take the money and run, sucks that you never found an enjoyable way to
make money. Most porn stars and escorts retire before their 30th
birthday. You are a little behind but in good company. I hear some of
those retired folks can figure out the tip in a diner (the super smart).
Some people just assume you are lying, I assume you are telling the
truth and you are smart like Mike Tyson ... "If I wanted to be a doctor
I'd be the best mother-effin doctor in the world ... I just used my
intelligence to punch people in the ribs"
I've "retired" 4 times but I am pretty good at what I do and always
return to help friends, clients, subs and ex employees. I like the work
and they always seek me out for help when things get complicated, it
seems I made a mark in the industry. I can see why you hang on to your
story but it just makes me feel sorry for you. I'm pretty sure you will
never understand any of this, so feel free to fill the void in your life
with self importance and regurgitations from the wall street journal.
Just to do the math, you claim to have retired in 1999 at age 31. That
means you made 1 million per year (after taxes)from your graduation in
1991(2) and made at least 5% on your investments from 1999 through 2009.
With a track record like that, you would be offered the moon and the
stars to stay in the game. You might be the first capitalist in the
world who doesn't have a price.
My point is, you don't really know what the fuck you are talking about
you just hear about a trend and pretend you were behind it first.
DGDevin
> I'm also a master baiter...
That much you got right, with a sideline as a bloviating Usenet twit.
RandyStoner
> DG wrote:
>
> > I'm out of Florida until the end of hurricanse season. I have been
> > retired for over ten years and I turn 41 next week.
>
> And you're a cowboy and an astronaut and you're weighing offers to be
> Commissioner of Major League Baseball and CIA director--you might do both to
> keep from being bored since being a globe-trotting playboy, film-producer
> and Formula One racer is getting a bit stale.
Max Mosley maybe, but not an actual F-1 racer.
DGDevin
> When did catagenesis cease?
That's not catagenesis in your brain Donny, merely decay.