Having trouble sleeping, so here's another random post!

An older post from Bronte Capital highlights the benefit for knowingly creating ginormous conservative banks. The gist of the argument is that along with creating these massive banks whose (monopolistic) tendencies create great wealth for its shareholders, you can ensure conservatism by straightjacketing these new huge entities with regulations.

You basically make the banks incredibly profitable, make them incredibly easy to run, and ensure their conservatism doesn't get them into trouble. You basically tap into the unwillingness of humans to give up a "good thing" out of fear of messing it up at a large $cale. (This reminds me of the Friends' episode where Joey and Chandler end up getting free porn on cable, and are so afraid of losing it, they refuse to turn off the TV - long after they've gotten sick of watching the porn)

This is an interesting point, but let's add in the op-ed by Calvin Trillian in the Times who claimed that the reason Wall St. failed was because "smart guys started going to Wall St." I'm too young to dispute the claim (although in my gut, it feels very wrong), but I will admit that smartness can work against you - this is a very common known problem in software development (the "not invented here" syndrome).

The narrator in the Times op-ed describes why this is problem: (emphasis mine)

"Of course it's accurate," he said. "Don't get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren't really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn't feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht."

While the op-ed is soft on facts, the logic makes sense to me. Smart guys made up some complex math which 'worked in theory,' then sold the "lower third of the class" on the notions, who foolishlessly went along with the plan since the "smart guys" made it up.

Within context of the Bronte Capital post, this makes a lot of sense.

Let's color in the recent debate over executive pay. As much as it pains the inner Libertarian in me to say it, capping executive pay for financials makes a lot of sense if you're trying to limit the risk that banks take. Executive pay will most certainly drive the "good" talent out, and that's a perfectly OK thing! They'll end up at hedge funds or a private company - they simply will stop gambling at the public's expense.

George Soros recently was quoted:

"That [executive pay caps] would push the risk-takers who are good at taking risks out of Goldman Sachs into hedge funds, where they actually belong, because hedge funds take risks with their own capital, not with deposits and not with government guarantees," he said.

Of course, this doesn't mean risk in the financial systems vanishes. LTCM is great example of a private hedge fund whose effects reverberated throughout the financial sphere - I don't think simply moving all that risk into the private sector alleviates all the problems, although it certainly does limit the risk of gambling at the taxpayer's expense.