“What is needed is a culture that induces bankers to do the right thing even if nobody is watching,” Lagarde said in her prepared remarks.
Do bankers now get paid for doing the right thing? Because if they don't, it's not going to happen.
Do bankers now get paid for doing the right thing? Because if they don't, it's not going to happen.
You need _infrastructure_ in place to make the bad actors irrelevant.
As we look at regulation of the financial system, I would argue that we should not lose sight of the systems we already have for mitigation and recovery. When they were most needed, they worked well.
The nature of a market economy is that people are free to make decisions, including accidentally bad and purposefully bad decisions. I don't think it's possible to eliminate the bad without also unintentionally limiting some of the future good.
Bankers are humans, the most intelligent species we know of. They want to be bad actors, and they're constantly dreaming up ways to do it better.
Any infrastructure or regulations will eventually (and probably soon) be co-opted. Furthermore, given the nature of regulations (that 1% are in control of them, and the other 99% are beholden), once co-opted they will be impossible to modify to repeal. Now they help the bad guys do bad things, and they're not going to let you take them away.
It gets worse, because humans are intelligent. If they spent all that effort co-opting these regulations, might it not be better to write the regulations in the first place? Much less effort for something even more adapted for them to do bad things.
And since the nature of legislatures is that 0.01% are on control of them, and the other 99.99% are beholden to them, once co-opted it's impossible to repair the damage.
So no, we don't need infrastructure. We need that like we need a hole in the head.
If the regulations raise the cost of malfeasance such that bad actors have to expend more to maintain their badness, then even fully captured regulations can still be a net positive. In other words, the bad actors are still bad, but there are fewer of them left, and they can't be quite as bad because it's more expensive to maintain the regulatory capture.
> In other words, the bad actors are still bad, but there are fewer of them left,
No. They can recruit. Any personnel shortfalls are temporary.
And then to pay them for doing the right thing.
Fannie and Freddie shoved mortgages through the pipeline to both increase their profits and fulfill their stated goal of increasing American home ownership. The latter is what most considered to be "the right thing" including their regulators.
But then the law of unintended consequences reared its ugly head, housing prices started to fall and we all realized how tied together that securitization pipeline had become. Investors bought credit swaps on their mortgage bonds to protect their downside and move the assets off their balance sheets in order to buy more mortgage bonds—also allowing retail banks to create more mortgages, further increasing home ownership. The companies who sold those swaps (AIG) assumed that housing prices would never fall and default rates would never rise.
They were wrong.
As soon as that black swan event happened and Bear, Lehman et al had to start marking losses on those MBS products, the market pounced. Then AIG had to start paying those swaps but couldn't (hence the nationalization).
While there were definitely bad actors (those handing out liar loans and so forth), at any individual stage in that massive, trillion-dollar pipeline, most actors were behaving in a way that rationally made sense. Banks sought to hedge their downside by buying CDSs against their MBS products. Insurers trusted the ratings agencies. The ratings agencies were too weak to do anything despite internal misgivings about those MBS products (and of course the incentive structure there is all sorts of stupid). The investment banks definitely twisted arms at the ratings agencies to get investment-grade ratings on what were truly junk bonds and that was bad on their part and arguably fraud, so yes, someone should probably be liable for that.
But what could've been done differently at the macro level to ensure that every actor in that pipeline acted in the interest of the "greater good" when we can't even define what that is? Yes, we could have tighter controls on mortgage underwriting standards but will that prevent the next crash? How do we hold someone liable for not avoiding a crash? We can't even tell when a crash is coming, are we honestly going to blame someone for not being able to do the impossible?
And that doesn't change the overarching problem of defining the right thing at every level. Was AIG acting unethically by failing to properly assess the risk of their CDSs? Or were they just incompetent?
There may be somebody, but they aren't known, don't get listened to or otherwise don't exist for purposes of this sentence. The existence of a Micheal Burry* does not keep a bubble from forming.
*A "The Big Short" person of interest.
But yeah - I'd expect a drop in stock prices once interest rates hike a bit. We have in effect a generation (perhaps two) that has known nothing but very low rates.
It might be easier to define the "wrong thing" to do, but even that is usually short for the "wrong thing to do yesterday". Most people don't go and make the exact same mistake again unless they believe there is a convincing reason why This Time Is Different™.
Common sense "wrong things" also bring tradeoffs or don't have clear policy mechanisms. Even if we all agreed the stock market was overinflated, how can we deflate it without restricting valid investment and hurting the broader economy?