Lecture on executive pay and the crisis

[HVC]

Criminals never think they're going to get caught, or they wouldn't be doing the crime. While a long prison sentence makes us feel all warm and nice, it won' stop financial fraudsters. Regulations won't either, completely, but it makes it harder to do and easier to catch. Canada has a highly regulated bank sector, and while there has been arguments that Canada coming through relatively unscaved was coincidental to these regulations i personally think they helped greatly.

I don't buy into the idea that there are two classes of people:  criminals and non-criminals.  I think a lot of people can be criminals in one country, and non-criminals in other countries.  It all depends on the legitimacy and authority of the legal system, and how well it rewards legal behavior and punishes illegal behavior.

what seperates a criminal from a non-criminal, i think, is the ease of commiting a crime. Not the prospect of getting caught. It's a lot harder to bribe in, say canada, then elsewhere. That's not becasue bribing isn't illegal elsewhere, just that we have more safe guards that make it harder here and thus more liekly to get caught. Adding years to sentences wouldn't stem the bribing anymore, i don't believe.

[HVC]

Besides, i'm not sure what's being proposed. No (or deminished) regualtions, but if you do something bad you go to jail. What's described as a punishable offense? and if you're codifying it as a ppunishable defense why not just codify it as a regulation?

[Martinus]

This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.

That's a terrible idea.

Criminal law is all about punishing someone after something happens.  It has no ability (or extremely limited ability) to prevent something from happening.

Yet we punish those who comitted crimes. We do not consider a few decades of prison for a murder a terrible idea just because the sentence did not come in time to save the victim - the point would be the same as with any other criminal activity - make it not worth it.

So you are in fact proposing regulation, only you advocate that any breach of regulation should carry a prison sentence. That's silly on several levels.

It's like saying that we don't need medical profession regulations, but doctors who do not prevent a patient from dieing should be charged with murder.

[Martinus]

Besides, i'm not sure what's being proposed. No (or deminished) regualtions, but if you do something bad you go to jail. What's described as a punishable offense? and if you're codifying it as a ppunishable defense why not just codify it as a regulation?

Yeah. This is an idiotic idea on a number of levels:

1) There is a "moral" component to criminal law, i.e. that in order for something to be a crime, there needs to be, ideally, a general consensus that it's an evil act. A lot of banking regulations do not work that way - contrary to what Tamas seems to believe, a lot of it is not really "cheating" - it's much more complex than that. So if we penalize all of it as crimes, we end up with a system that is perceived as unjust.

2) Criminal law usually carries penalties for individuals not corporations. So we let organizations get away with it just so some poor schmuck could go to jail.

3) Criminal law sets the bar much higher for a succesful conviction than a regulation for e.g. a fine/corrective measure. By making a regulatory breach a crime, we are effectively raising the penalty (but not on the right people/entities, necessarily) - see 2) above, but we are decreasing the conviction rate. That's a rather poor trade off in the system where we want people to behave well and self-police.

[Martinus]

I am taking an extreme position, yes. Consider it a direction. In general, in my view, society should find the point of minimum necessary government involvement in life as a whole (and that may be quite far from no involvement at all), and not, like it seems to be nowadays, seek more direct steering to every issue (financial crooks, children being children, etc). Because that is bound to fail.

Don't you understand that a lot of the problems with the financial crisis do not stem from the fact that these people were "crooks"? Taking excessive risk is not a swindle per se - there is nothing evil in increasing your debt to equity leverage ratio - it may be unwise, but it is not unethical as such. And you cannot get into an ex-post-facto analysis and punish people for taking an excessive risk after their funds collapse because (1) it does not meet the clarity criterion that is expected of criminal law in modern Western civilization, (2) it will excessively curb risk taking (which is also bad).

[The Minsky Moment]

IMO Martinus is right. 

If anything, financial misdeeds have become over-criminalized in the US in recent deeds.

[DGuller]

IMO Martinus is right. 

If anything, financial misdeeds have become over-criminalized in the US in recent deeds.

Agreed.  When our government made sure that Wall Street execs who sank our economy lost most of their wealth that it turned out they didn't earn anyway, that was still acceptable.  But when they sent a whole lot of them to prison?  That was over the top.

[frunk]

It's difficult to see how dropping regulation and enforcing through criminalization would in any way be a step forward.  Considering most white collar criminals are found precisely because they violated regulations, it would make finding lawbreakers of this type a great deal more difficult.  I think you'd have to have a DEA/BATF level of organization in the US to even begin to attempt enforcement.  I'm not sure even that would be enough, since there's a great deal more financial activity in the US than drug trafficking. 

[Razgovory]

The thing with criminal prosecution is that it's extremely hard to prosecute someone on this type of thing.  You need a lot of experts shifting through the data to prove it and it takes years.  Many of those experts would find that they would make much more money working for a business rather then the government.

[crazy canuck]

IMO Martinus is right. 

If anything, financial misdeeds have become over-criminalized in the US in recent deeds.

If he had gotten this one wrong we would have known for sure his claim to being a lawyer was more than merely dubious.

[Tamas]

Regarding the non-criminal part: well, I do maintain that most of these players would not had gone that far if they were not sure to count on state intervention in case of a bust - remember there were plenty of past examples. Plus, those excessive risk takers should have been flushed out of the system, not maintained in it. It's all fine (I guess, given the situation at the time) to spend all those hundreds of billions of dollars to stop the disease from spreading, but color me skeptical it couldn't be done without the major players involved in it being over and out.

Anyways, what is YOUR opinion on how to break the cycle of the "blind run on loans - panic and bust" which we seem to have encoded in the current system? Or we should just accept that every couple of decades, the common people's tax money must be burned away to maintain the aristocracy's status quo?

[Razgovory]

Why would you expect the people who took excessive risks would be flushed out of the system?  Even if their companies went belly up it's not like they were going to be left with only the shirts on their backs.  They typically get a cozy golden parachute.  And lots of risk takers jumped off the merry go round before it stopped and caught on fire.  Most in fact.  This was something that was building for years.   Someone could be making insane risks, for years and then retire long before the whole thing blew up.  Most people think they will.

[crazy canuck]

Iirc the main problem with the mortgage backed securities wasnt the people who were taking the risks in the first instance. The people who gave out the loans packaged the risk into something that looked less risky although the people who packaged the risk in the first instance knew what they were selling was crap.  But hey the market for MBSs was hot so the pressure to give more and more questionable mortgages was on.  And why would the original lenders care - those loans would be off their books and put into a MBS and sold for a profit quickly.

The people buying the MBS often had no idea what they were holding and that the paper was worse then worthless.

[frunk]

Anyways, what is YOUR opinion on how to break the cycle of the "blind run on loans - panic and bust" which we seem to have encoded in the current system? Or we should just accept that every couple of decades, the common people's tax money must be burned away to maintain the aristocracy's status quo?

It comes down to breaking the ability to take large risks with federally insured assets.  That was never the goal in insuring them, and letting it perpetuate even now is continuing the problem.  Restoring the separation of investment from savings banks would help enormously.

[fhdz]

It comes down to breaking the ability to take large risks with federally insured assets.  That was never the goal in insuring them, and letting it perpetuate even now is continuing the problem.  Restoring the separation of investment from savings banks would help enormously.

Yes. Glass-Steagall never should have been repealed.