William (Bill) Black – Wall Street’s “Perverse Incentive Structures” Guarantee Another Crisis

Posted: August 14th, 2010 by: h2

There’s a lot of stuff going on right now in the economy, I’ll post some more soon, but for now let’s take a listen to one of the few coherent voices out there, William Black.

The Obama Administration says the recently signed Dodd-Frank Law, the biggest bank overhaul in decades, will ensure against another financial crisis.  William Black Associate Professor of Economics and Law at the University of Missouri-Kansas City couldn’t disagree more.

“They haven’t dealt with any of the fundamental perverse incentive structures that cause these recurrent, intensifying crises,” he tells Tech Ticker. In other words, the incentive to take excessive short-term risk in exchange for a multi-million dollar bonus is still very much intact. “Your pay should be based on long term performance instead of short term results which are easy to gimmick through accounting,” he says. 

Excessive pay on Wall Street, which Black says is the biggest culprit of the financial crisis, is just one reason we’re likely to witness another crisis in the not so distant future. Financial regulation reform also fails to deal with the “professional compensation” structure, says Black, a former federal regulator during the Savings & Loan Scandal. By that, he means the continued reliance on lawyers, appraisers, rating agencies and auditors ensures these professionals will remain the “most valuable allies to the frauds.”

We’re also no safer with the Dodd-Frank law than without it simply because, as a whole, the financial system doesn’t believe in regulation, Black observes. “It’s the ideology [which says] ‘you can never regulate effectively’, so why bother to try.” Finally, Black says, the law fails to end ‘Too Big to Fail’. As long as this policy exists we’re guaranteed to face more bailouts. “Why would we allow these systemically dangerous institutions to continue?,” he wonders.
Wall Street’s “Perverse Incentive Structures” Guarantee Another Crisis, Says Bill Black
by Peter Gorenstein – Yahoo

Comments are closed.