As with most man-made disasters, the series of financial ones in recent years were caused by a combination of greed and hubris. It would be easy to pin this all on some rogue trader or one sketchy CEO but the roots of the problem run much deeper and operate on so many more levels. In reaction to the situation, the left screams “more regulation” and the right returns “let the market correct”. If you give it any serious thought, both are simplistic because neither deals with the real problem of human fallibility.
A PBS
Frontline episode from earlier this year did a good job of explaining how the Collateralized Debt Obligations (CDO) were created by some very smart people at J.P. Morgan. What happened next was that people who werenʻt smart enough to understand the product started acting like door-to-door encyclopedia salesmen. With no understanding of what they we dealing with, these people started pricing the product merely to sell and make a profit for their employer and through bonuses, themselves. Iʻm not talking about a $100 gift certificate to Red Lobster but more like compensation in the millions. When there is temptation like that floating around, thereʻs always going to be rule bending and eventual law breaking.
It really bothered me when I first heard about
CDOs but the real issue didnʻt hit me until the recent
LIBOR scandal broke. In this free-for-all, bankers in London were colluding to artificially raise or lower the rate at which banks borrowed money. The effect of this manipulation was worldwide because the rate is used for calculations of financial derivatives everywhere. Once again, greed and hubris had trumped the market.
So, how do we control greed and hubris? Do we make penalties stiffer? Pass new laws? Set an example of one person to the remaing cretins? I doubt any of these will work. Why? Because they never seem to have in the past. What I propose is a radical revaluation of work by these economic/banking geniuses, derivative salespeople, and bank CEOs. Create a new class of income like how we have a separate one for capital gains. We can call it leech effort, ill-gotten gains, or unseemly gains. Any income that cannot be said to be derived from an actual, physical movement of any kind should fall into this category. Yeah, I know this is unrealistic but can you imagine how much of a stir it would cause?
It is the lure of large sums of easy money that makes people break the law. How much is enough when you can get away with these kinds of crimes? If there was some way to classify the gains as I showed above, the government could choose to tax it, apply cap and trade to it, or just plain ignore it. I think the stigma of making a fortune this way will shame most people into another line of business.
For those (and you know who you are) that say this will just push the plotting and scheming off-shore, I’d like to remind you that America is still the largest economy in the world. If we can’t enforce good behavior by not doing business with the people who use these tools, what’s the sense in being #1? Maybe we can’t be the world’s police force but we can be the adults in the room.
So That's Life?
How Much Money is Enough?
07/30/2012Posted in commentary | Leave a Comment »