04 November 2008
Lessons of the Financial Crisis
Stephen Schwarzman’s prescription for the ailing global financial system in the November 4, 2008 Wall Street Journal won’t work if its focus is on reforming regulatory agencies in the U.S. Just like Alan Greenspan, he mistakenly believes that American markets act in their own self interest and adopt his principles. That they don’t is shown by the incentives offered to their executives. Those markets do not reward their most effective controllers as much as they reward their most productive rainmakers. Other cultures value the prestige that comes with a regulator’s power over events more than ours does. We keep score in judging a person’s accomplishments by measuring the wealth he accumulates. Because that wealth is the product of the market, there is a conflict for the person who would excel by regulating the market.
What is needed is for a scale of rewards to be offered to regulators that is independent of the market and comparable to the rewards paid by the market to its biggest revenue producers—outsized income to regulators on the scale of successful hedge fund traders. Only then will the talent be found that is needed to counterbalance the ingenuity of the financial wizards who create securities and other credit products that generate great wealth but risk imploding the entire market.
Stephen Schwarzman’s prescription for the ailing global financial system in the November 4, 2008 Wall Street Journal won’t work if its focus is on reforming regulatory agencies in the U.S. Just like Alan Greenspan, he mistakenly believes that American markets act in their own self interest and adopt his principles. That they don’t is shown by the incentives offered to their executives. Those markets do not reward their most effective controllers as much as they reward their most productive rainmakers. Other cultures value the prestige that comes with a regulator’s power over events more than ours does. We keep score in judging a person’s accomplishments by measuring the wealth he accumulates. Because that wealth is the product of the market, there is a conflict for the person who would excel by regulating the market.
What is needed is for a scale of rewards to be offered to regulators that is independent of the market and comparable to the rewards paid by the market to its biggest revenue producers—outsized income to regulators on the scale of successful hedge fund traders. Only then will the talent be found that is needed to counterbalance the ingenuity of the financial wizards who create securities and other credit products that generate great wealth but risk imploding the entire market.
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