Michael Lewis and David Einhorn published this outstanding article in The New York Times regarding the “misaligned interests” at which we should be pointing fingers for the economic crisis.
In it, they identify a set of structural failures:
- When ratings agencies such as Standard & Poor’s and Moody’s are paid by the very organisations whose credit they are rating, they’re not incentivized to issue poor ratings.
- What will ever compel the Securities and Exchange Commission (SEC) to take a hard line on corporate fraud, when it serves as a staging-post for getting its officers highly-paid jobs on Wall Street with the very companies it’s supposed to be investigating?
- How could any of the chief executives of the investment banks act as a whistle-blower when to do so would cause their subsequent replacement by shareholders eager to benefit handsomely from the credit bubble?
Together, these factors evidence a disturbing trend in the world’s largest market economy: when a free market system, which is predicated on transparency and accountability (to enable the direction of investment), starts to undermine those very things, investment funds can’t be pointed at the opportunities that best deserve them. That’s when we end up with a recession caused by over-investment. Hence, it’s even more foolhardy that authorities are now pressuring the Financial Accounting Standard Board to drop “mark-to-market” accounting.
Still, it’s not all doom and gloom. Lewis and Einhorn conclude with their short-list of recommended changes to prevent this from happening again. Have a read – it’s well worth it.
