Can Skin in the Game Fix The Financial Sector?
I don't tend to think of myself as particularly friendly to the Wall Street version of events over the past few years. I'm more one of those pitchfork-types that the president warned about. But for all my populist rage, I give the bankers this: They believed their own hype. There were a few sober moments where some CEO or another marveled over the apparently unsustainable boom. But these guys all owned stock in their companies. They all had skin in the game. They didn't just drink the Kool-Aid. They crashed through the wall and screamed "Oh Yeah!"
Which is why I'm fundamentally skeptical of proposals to right the financial sector by forcing institutions to own a piece of the financial products they put together. Obama included this idea in his white paper. Daniel Indiviglio sort-of argues for a similar reform in the rating agency market.
But I'm not seeing it. I don't think we need to be scared of bubbles that everyone knows are a bubble. I think we need to be scared of bubbles where everyone has convinced themselves we've reached a new normal. Those are the times when the experts are excited to have skin in the game. And if you look at the exposure of Citibank and Lehman and Bank of America, you have to conclude that this was one of those times. In fact, that was the problem. If the housing bubble had been limited to savvy Wall Street firms snookering some credulous Midwestern pension funds, we'd be in much better shape.
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