6 ms·

As long as risks are financial only, they will just get insurance against it and still get away with the current risk-taking behavior, passing the costs to the

As long as risks are financial only, they will just get insurance against it and still get away with the current risk-taking behavior, passing the costs to the customer. Criminal punishments (jail time) might work. I think that taxing transactions in financial products would help a lot more, making the finance industry smaller, which I think would be very beneficial to society.

maxerickson 10y ago
If the insurance is correctly priced then the banks that don't pass the cost of risk on to customers should be able to compete nicely against the ones that try to.
- deleted 10y ago
  [deleted]
- winstonsmith 10y ago
  > If the insurance is correctly priced then the banks that don't pass the cost of risk on to customers should be able to compete nicely against the ones that try to. This theory breaks down if you distinguish between banker and bank as per the article. In the short term, the crooked banker with insurance can out-compete the honest uninsured banker by making high risk loans, not caring if the loans are paid back. In the short term the crooked banker can accumulate tens or hundreds of millions of dollars and happily retire when in the long term the loans fail and the bank goes bankrupt. The honest banker has to explain to his share holders etc. why crooked banker's bank is growing so much faster than his bank. His borrowers have to compete for houses against borrowers from crooked bank who can borrow more and therefor pay more for houses. His "under-performing" bank may become an acquisition target of crooked bank. The requisites for this dynamic are the absence of fear of criminal prosecution and perverse incentives via excessive CEO compensation.
  - maxerickson 10y ago
    Where's the insurance company in all this? They aren't going to sell a risky crooked banker a blanket policy that covers being crooked for nothing, they are either not going to sell a policy at all or are going to charge crazy premiums for it. Insurance isn't some magic thing that you just go get, it has a price set by well informed underwriters.
    - winstonsmith 10y ago
      Eg., AIG. The "magic" is that insurers can also be crooked, have CEOs with perverse incentives and effective immunity from prosecution, and be favored with bailouts.
VHRanger 10y ago
Making the finance industry smaller would not help society, because it would make lending more expensive. That would mean more expensive mortgages, more expensive loans, less VC funding, etc. Making big banks smaller also will not help socially because banks have returns to scale in diversification. So bigger banks are less likely to fail by themselves, and can lend for lower rates, which is socially good (recent research [1] [2] indicates this might not be true for the biggest banks -- they exhausted benefits of scale). Now one might ask if "too big to fail" effects might incentivize the bigger banks to act recklessly and counteract the above benefits? The answer is that there's the evidence does not back that up [3] at least for 2008 [4]. But that doesn't mean it is or is not the case going forward. Why did banks act so recklessly if they were not acting on too big to fail incentives, then? The answer, like in the OP, is management incentives. The managers could not give less of a fuck if the bank failed, because they were incentivized by shareholders, in the form of bonuses, etc. to generate large year-over-year profits. And in any market close to efficient, the only way to do that is to take on large risks. Not only did the managers not lose money if the bank failed, they didn't have any personal risk whatsoever. The lead up to 2008 was perfectly strategically rational coming from a bank manager's point of view. As the poster above me says, one way to fix that is to impose penalty from the judicial system. There's only so much financial regulation can do. But DoJ has been awful at that, even clearly criminal acts (remember HSBC?) doesn't send management to jail. [1] http://commons.colgate.edu/cgi/viewcontent.cgi?article=1053&context=econ_facschol http://commons.colgate.edu/cgi/viewcontent.cgi?article=1053&... [2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2655448 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2655448 [3] http://fic.wharton.upenn.edu/fic/papers/11/11-47.pdf http://fic.wharton.upenn.edu/fic/papers/11/11-47.pdf [4] Remember the official fed policy was not to bailout banks coming into the crisis. They let the first behemoth fail, but quickly realized the disaster that awaited the global economy if they let the next one fail.
- collyw 10y ago
  I was under the impression that the finance sector has shrunk since the crisis. Lending rates seem to be pretty much the same.
  - 10y ago
zo1 10y ago
Either way, how can we expect such reform to happen when the politicians we elect to do our bidding aren't held to similar or larger standards? They barely have "career" risks in not getting elected if a policy fails. But that's only if it fails spectacularly-enough for the media to make a big fuss over it. Most of the time, they double-down and claim "lack of funding", or something. That's their get-out-of-jail-free card.
MR4D 10y ago
Your last sentence is an unbelievably ignorant comment. First, what are you going to tax? Credit card use? Home loans? Business loans? Exchanging money? Debit card use? Deposits & withdrawals? Secondly, making the financial industry smaller makes the economy smaller. There is a direct relationship. So if you want to shrink it, realize that your job, my job, and everyone here on HN will have their job at risk from a shrinking economy. The financial industry shrunk in 2008, and also in the great depression. You might want to understand the cause and effect in the business before you make comments like your last sentence. There are some simple solutions to the financial misbehavior, but politicians on both sides aren't interested in doing them. Shrinking the industry and taxing transactions aren't solutions.

maxerickson 10y ago

If the insurance is correctly priced then the banks that don't pass the cost of risk on to customers should be able to compete nicely against the ones that try to.

deleted 10y ago
[deleted]
winstonsmith 10y ago
> If the insurance is correctly priced then the banks that don't pass the cost of risk on to customers should be able to compete nicely against the ones that try to. This theory breaks down if you distinguish between banker and bank as per the article. In the short term, the crooked banker with insurance can out-compete the honest uninsured banker by making high risk loans, not caring if the loans are paid back. In the short term the crooked banker can accumulate tens or hundreds of millions of dollars and happily retire when in the long term the loans fail and the bank goes bankrupt. The honest banker has to explain to his share holders etc. why crooked banker's bank is growing so much faster than his bank. His borrowers have to compete for houses against borrowers from crooked bank who can borrow more and therefor pay more for houses. His "under-performing" bank may become an acquisition target of crooked bank. The requisites for this dynamic are the absence of fear of criminal prosecution and perverse incentives via excessive CEO compensation.
- maxerickson 10y ago
  Where's the insurance company in all this? They aren't going to sell a risky crooked banker a blanket policy that covers being crooked for nothing, they are either not going to sell a policy at all or are going to charge crazy premiums for it. Insurance isn't some magic thing that you just go get, it has a price set by well informed underwriters.
  - winstonsmith 10y ago
    Eg., AIG. The "magic" is that insurers can also be crooked, have CEOs with perverse incentives and effective immunity from prosecution, and be favored with bailouts.

VHRanger 10y ago

Making the finance industry smaller would not help society, because it would make lending more expensive. That would mean more expensive mortgages, more expensive loans, less VC funding, etc. Making big banks smaller also will not help socially because banks have returns to scale in diversification. So bigger banks are less likely to fail by themselves, and can lend for lower rates, which is socially good (recent research [1] [2] indicates this might not be true for the biggest banks -- they exhausted benefits of scale). Now one might ask if "too big to fail" effects might incentivize the bigger banks to act recklessly and counteract the above benefits? The answer is that there's the evidence does not back that up [3] at least for 2008 [4]. But that doesn't mean it is or is not the case going forward. Why did banks act so recklessly if they were not acting on too big to fail incentives, then? The answer, like in the OP, is management incentives. The managers could not give less of a fuck if the bank failed, because they were incentivized by shareholders, in the form of bonuses, etc. to generate large year-over-year profits. And in any market close to efficient, the only way to do that is to take on large risks. Not only did the managers not lose money if the bank failed, they didn't have any personal risk whatsoever. The lead up to 2008 was perfectly strategically rational coming from a bank manager's point of view. As the poster above me says, one way to fix that is to impose penalty from the judicial system. There's only so much financial regulation can do. But DoJ has been awful at that, even clearly criminal acts (remember HSBC?) doesn't send management to jail. [1] http://commons.colgate.edu/cgi/viewcontent.cgi?article=1053&context=econ_facschol http://commons.colgate.edu/cgi/viewcontent.cgi?article=1053&... [2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2655448 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2655448 [3] http://fic.wharton.upenn.edu/fic/papers/11/11-47.pdf http://fic.wharton.upenn.edu/fic/papers/11/11-47.pdf [4] Remember the official fed policy was not to bailout banks coming into the crisis. They let the first behemoth fail, but quickly realized the disaster that awaited the global economy if they let the next one fail.

collyw 10y ago
I was under the impression that the finance sector has shrunk since the crisis. Lending rates seem to be pretty much the same.
- 10y ago

zo1 10y ago

Either way, how can we expect such reform to happen when the politicians we elect to do our bidding aren't held to similar or larger standards? They barely have "career" risks in not getting elected if a policy fails. But that's only if it fails spectacularly-enough for the media to make a big fuss over it. Most of the time, they double-down and claim "lack of funding", or something. That's their get-out-of-jail-free card.

MR4D 10y ago

Your last sentence is an unbelievably ignorant comment. First, what are you going to tax? Credit card use? Home loans? Business loans? Exchanging money? Debit card use? Deposits & withdrawals? Secondly, making the financial industry smaller makes the economy smaller. There is a direct relationship. So if you want to shrink it, realize that your job, my job, and everyone here on HN will have their job at risk from a shrinking economy. The financial industry shrunk in 2008, and also in the great depression. You might want to understand the cause and effect in the business before you make comments like your last sentence. There are some simple solutions to the financial misbehavior, but politicians on both sides aren't interested in doing them. Shrinking the industry and taxing transactions aren't solutions.