Louise Uchitelle’s review of Simon Johnson and James Kwak’s book 13 Bankers nicely summarizes the conventional post-crisis thinking.
To put it bluntly, as this book does: the efficient-market hypothesis does not work. It never has. Markets are not self-correcting. Left to their own devices, bankers at the biggest institutions can’t seem to stop themselves from speculating with borrowed money until they inevitably crash the system.
Fair enough. This line is repeated over and over again these days from various players, and few are willing to poke their heads out to disagree.
And yet it’s from the same quarters (liberal mostly) that you hear scandalous howls over the profits made by the likes of John Paulson (and Magnetar and some traders at Goldman Sachs) who did actually bet against the housing, and whose actions, to some extent acted as a countervailing force.
Granted, some would argue that Paulson helped fuel the bubble with his hand in creating synthetic CDOs, and certainly a handfull of hedge funds would not have been nearly significant enough to actually push back against the boom in housing.
But if we want a system that to some extent self-regulates, why are we, ex post facto, taking aim at those that bucked the trend?
Remember, it’s Simon Johnson who himself called for John Paulson to be banned for life from the securities industry.
There are already plenty of disincentives to buck from the crowd.
Compensation pays your for money made now, and you’re not rewarded for being prudent long-term if it doesn’t feed to the bottom line now. Plenty of folks made a mint being long housing, and the losses they suffered still didn’t knock them off the perches from the wealthy.
So for God’s sake, let’s not be such a slave to our hindsight bias that we actually go even further in punishing those whose foresight and actions could in some way counterract our herdish instincts.
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