My economic recovery plan
Posted by aogWednesday, 11 March 2009 at 19:31 TrackBack Ping URL

Make it illegal for anyone with an MBA from an Ivy League school to a corporate officer or member of the board of directors of a publically traded company. That would be far better and more effective than any additional banking or security regulations.

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cjm Wednesday, 11 March 2009 at 21:36

my plan is to just rewind the calendar to 1996 ©. everyone goes back to the place they lived then, etc, etc.

Ali Choudhury Thursday, 12 March 2009 at 14:09

I doubt disqualifying MBAs would make any difference. Here a number of banks and businesses have been led to disaster by staff members who joined out of high school and worked their way to the top. John Kay suggested bankers should have to pass exams and become professionally qualified like doctors, lawyers and accountants. That ignores the fact that Bradford and Bingley was led to ruin by a former lawyer and the Royal Bank of Scotland was destroyed by Fred Goodwin, a chartered accountant.

There is no solution to this other than hard experience. My own suggestion would be to do what the Royal Navy did back in the day: hang a lacklustre admiral now and again to encourage the others to perform to expectations.

cjm Thursday, 12 March 2009 at 14:31

all kidding aside, the way to avoid monumental collapses is to avoid centralization of resources. don’t allow individual companies and institutions to get ginormous. develop distributed architectures across society, that can handle disruptions to individual nodes. also hang a few top dogs each year.

Annoying Old Guy Thursday, 12 March 2009 at 20:30

Unfortunately we seem to forget that hard experience in less than a generation.

Decentralization doesn’t help that much. We’re seeing entire shoals of banks go under because despite being completely independent, they all jumped on the same bogus securities.

Harry Eagar Thursday, 12 March 2009 at 22:43

The MBAs were certainly worth a lot less than they got.

The prophylactic was what we always knew it was. Glass-Steagall.

David Cohen Friday, 13 March 2009 at 06:42

I’m a little interested in the mental model some of you are using here. We’ve had 25 years of expansion; did you really think that recessions were obsolete? Everyone looks brilliant during an expansion because everything they do makes money; everyone looks stupid during a recession because nothing they do makes money. The people who, by the end of the expansion, we’re really out on a risk/return limb looked particularly brilliant (the rocket scientists) and then look particularly stupid (how could you not have factored in systemic risk). There’s no professional certification you can force upon human beings that’s going to make them cautious in the 25th year of an expansion.

A recession was always inevitable. When it happened, somebody was going to get blamed. The bankers happened to be their when the number came up.

Annoying Old Guy Friday, 13 March 2009 at 09:47

No, but I think this one will be much deeper and widespread than a “normal” recession because of government interference and much worse than average management. I think it is stupid in all times and places to bet everything and then some on the presumption of endless growth. Beyond all of that, I wasn’t proposing a certificate of caution or competence, but a certificate of reckless incompetence.

P.S. Heh, as a personal story, the high tech company I was with during the true heyday of the dot com boomed managed to eak out a just slightly better than T-bill returns over several years. We laughed muchly about it at the time. The esteemed leader had, of course, an MBA from Standford. So, no, not everyone looks brilliant during an expansion.

Harry Eagar Friday, 13 March 2009 at 11:43

I’d like to hear your views on ‘government interference’ with respect to AIG.

Shouldn’t have interfered at all? Should have interfered earlier?

Bret Friday, 13 March 2009 at 12:39

aog wrote: “…I think this one will be much deeper and widespread than a “normal” recession because of government interference…

What’s normal? If Kurzweil’s singularity is accelerating us faster than government is decelerating us, we’ll still do okay. I see us moving asymptotically towards France’s economic level. Life is not so bad in France for most. Subjectively, I personally dislike the lack of economic freedom, but that’s just too bad for me.

David Cohen Saturday, 14 March 2009 at 11:03

It’s probably also worth noting that it’s an open question in org studies whether managers and strategies matter, or if only industry level effects matter. Probably the prevailing opinion, if we include economists, is that managers don’t matter.

Annoying Old Guy Saturday, 14 March 2009 at 17:19

Mr. Eagar;

I think “avoided interference earlier” would be my pick. This would have had several salutary effects ameloriating the problem

  1. Without the FM / CRA bubble forming in real estate the overhang for AIG would have been far less.
  2. As previous, but resulting in an overhang for the entire banking sector that would have been much less, so that an AIG failure would have been more localized and survivable.
  3. Regulators could have focused on actual regulation, rather than actively encouraging banks to hand out ever riskier mortgages to avoid lawsuits and regulatory punishment.

One of the problems on my side of the fence is that these problems aren’t prevented by one, brilliant policy recommendation, but a number of very mundane, unexciting policies, and the actual enforcement thereof rather than chasing after the next exciting set of regulations. This latter is one of the key failures of the modern regulatory state, which is that regulations which fail are not removed or eliminated, but left in place while other regulations are accreted on top of them. I think it would be interesting approach to state that the regulators get X pages of regulations. Once they hit that, they can only impose new regulations by removing old ones.

Here is a good essay along with links that lays much of this out better than I can.

P.S. I can’t find the link now, but it pointed out how telling it is that this derivative crisis affected only home loans, not commercial loans. Not unreasonable to think that the difference in de facto government backing was the match that set one on fire and not the other.

Harry Eagar Saturday, 14 March 2009 at 23:14

Guy, you understand that AIG’s problems have nothing to do with mortgages? It was credit default swaps, which are unregulated.

I can think of one regulation that was removed: Glass-Steagall. In fact, many have been removed.

I’m having trouble fitting your economic recovery plan into your earlier views about the competence of American business managers, which you were defending.

Annoying Old Guy Sunday, 15 March 2009 at 08:26

And what were those credit default swaps based on?

And I don’t remember defending the competence of American business managers, but rather disputing the implied claim that government managers / regulators were any more competent.

Why don’t you tell me how Glass-Steagall would have stopped the AIG problem.

Harry Eagar Sunday, 15 March 2009 at 15:03

As I’ve said before, G-S itself was outflanked by changes in financial arrangements. It should have been extended not killed. The strategic error was to think that unsupervised markets would self-correct.

The credit default swaps weren’t based on anything. It was a pure bucket shop.

David Cohen Sunday, 15 March 2009 at 18:35

Ah, Harry again confirms the wisdom of Justice Thomas’ great dissent in the BCRA case:

Every law has limits, and there will always be behavior not covered by the law but at its edges; behavior easily characterized as “circumventing” the law’s prohibition. Hence, speech regulation will again expand to cover new forms of “circumvention,” only to spur supposed circumvention of the new regulations, and so forth. Rather than permit this neverending and self-justifying process, I would require that the Government explain why proposed speech restrictions are needed in light of actual Government interests, and, in particular, why the bribery laws are not sufficient.

Andrea Harris Sunday, 15 March 2009 at 22:35

“my plan is to just rewind the calendar to 1996 ©. everyone goes back to the place they lived then, etc, etc.”

No thanks. That means I’ll have to go back to Miami and I refuse to ever go back to Hell By The Sea.

Harry Eagar Monday, 16 March 2009 at 00:03

It turned out that the financial regulatory laws did not have many limits.

Whatever your general views about the reach of the law, the nostalgia for the unregulated markets seems mighty strange to me now.

Ah yes, Andrea, one of my smoother moves was blowing a job interview at The Miami New in 1985. Had I shown a little more finesse, I could be unemployed now.

Annoying Old Guy Monday, 16 March 2009 at 08:21

Why? We are experiencing an economic crisis created by massive government intervention. Obviously freer markets are going to remembered more fondly.

Harry Eagar Tuesday, 17 March 2009 at 13:40

Except that there’s no evidence that they are being remembered more fondly.

Annoying Old Guy Tuesday, 17 March 2009 at 14:16

Ah — sorry about that. I was relying on the anecdotal report of this guy who was going on about “nostalgia for the unregulated markets”. But now, thanks to you, I realize he was just being clueless. Thanks for straightening me out!

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