Something is very wrong, and the “authorities” are unlikely to fix it. Ostensibly, it is a financial crisis, and the financial world is surely a wreck. But the question we haven’t dealt with yet pertains to the kind of crisis we are in. If it is a financial crisis, then a financial fix will do the trick. If it is not essentially a financial crisis, then tinkering with finances may be more like rearranging the furniture on the Titanic, hoping that a better arrangement will keep the boat afloat.
According to a recent NYTimes article:
Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s (Security and Exchange Commission) agenda.
IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street….
How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html
Systemic means that the problem is not one thing or another, but the whole system is skewed wrong. If this is true, then financial adjustments are unlikely to make any significant difference in the long run. All they will do, is to keep those who are in power in power. Apart from the bailouts, a different group of people would float to the top. Bailouts will, then, simply perpetuate the status quo.
Real solutions to our problem will require a real definition and understanding of the problem, and some genuinely new thinking about it. Once the fox has been given the authority to guard the chicken house, what can the chickens do?