In Animal Instincts: Main Street Seeks Revenge on Wall Street, Robert Roy Britt and Jeanna Bryner argue unemotionally about why emotional needs should to be satisfied in a banking bailout, for business reasons.
In a free market economy, it doesn’t make sense to complain about executive pay – it is what it is, people only pay high salaries and bonuses because they can still make a profit and therefore shareholders are happy.
Moral hazard is a game theory phenomenon, if you play a game once and people lose badly you can help them out, but that will make them less worried about losing the next time they play. Similarly if people cheat and you don’t punish them or even play badly and don’t lose, you create a problem next time you play. Bailing out large numbers of mortgage defaulters creates moral hazard but not punishing people who deceived does too.
It is the job of a CEO to champion a company, but not to lie to shareholders. If things are OK this isn’t an issue and gets forgotten about. There are many CEOs who behaved like Wachovia’s Robert Steel. He appeared on a TV show (Cramer’s Mad Money) that styles what should be the sober, conservative, world of finance into an activity that looks pro-football, with shouting and bright colors and said his team was winning, days before Wachovia collapsed completely. Entertainment freakshows about speculation, are part of the problem – ditching shows like Cramer’s and replacing speculation with sober investment advice from someone like Buffet will happen of its own accord (you don’t get entertainment shows called ‘Mad Money’ in a deep recession), but Steel is a different issue.
You only need to punish a few people to avoid long term moral hazard involving large businesses. It is what it is, and the fear of god needs to be put into executives and CEOs of companies that could fail. This would create both transparency now, for people to see each others hands and a better game next time.
In addition, when you effectively nationalize banking, the shareholders are the country’s voters and they need to be kept happy. Creating a mechanism to put people like Wachovia’s Robert Steel in jail makes both good business sense and keeps the shareholders in a country happy.