Why we need to end the system of private profits and public losses
Posted by: in Money NewsFiled under: Market matters, Politics, Headline news
Today, the U.S. Treasury Secretary presented a plan to overhaul regulation of U.S. capital markets. As I posted over the weekend, the plan does not really address the cause of all those economic problems.
However, it is very consistent with the administration’s tendency to use crises as a way to push its agenda. That’s what happened in 2001 when it used the recession to push its $1.3 trillion tax cut. And then there’s the biggest enchilada of all - using 9/11 as an excuse to attack Iraq - a move that’s cost the lives of 4,000 soldiers and is forecast to take $3 trillion out of the U.S. Treasury.
I don’t think the proposal will stand up for long but the deeper issue of what caused the problem and how to keep it from happening in the future remains. And while there are clear answers to either, I definitely think that serious analysis of these questions should be done before changes are made to the system.
From my perspective, the basic issue is that the financial system is set up to make gains private but losses public. If it changes that scenario - for example, to make gains and losses private - then the financiers who make the decisions will have an incentive to enjoy the benefits and the costs of their decisions.
Such a system would make it in financiers’ best interests to be more cautious. But as their incentives currently stand, they get rewarded for doing large deals and when some of those deals fall apart, the government steps in to clean up the system.
This is the result of the political power of financiers’ campaign contributions. Unfortunately, there are only two ways that the system can change from private profit/public loss to private profit/private loss. If the financiers demand that the government changes the system. Or if the campaign clout of those hurt by the current system exceeds that of the financiers.
Neither outcome appears likely at the moment.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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