Monday, April 27, 2009

Financial crisis quote

Krugman in the NY Times:
Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.
Even the temporary appearance of success offered gigantic rewards. That's the problem with the financial system in a nutshell. You can be running your institution into the ground, but as long as you do whatever it takes to keep your stock price high from one quarter to the next you will get richly rewarded.

Are you a financial manager? Then you just have to play well in the only game everyone scores, and that's about making short-term market gains. If you look to the long-term viability of your institution, behave more cautiously than the herd, you won't risk enough and earnings will slow. And so your job will go to someone who is more aggressive. So you do the sensible, common, and obvious thing: you play a relatively short-term game, knowing that any serious long-term pain will be the taxpayer's burden.

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