Friday, May 29, 2009

Mechanism Design

Not to beat the same dead horse as always, but ... giddy-up! In my defense, Alan Blinder repeats himself as well, and his WSJ op-ed is identical to the comments he made a month ago at that Minsky conference.

The source of the problem is really quite simple: Give smart people go-for-broke incentives and they will go for broke. Duh.

Nothing has changed about the structure of financial industry incentives.  Literally nothing.  If anything, the bailouts have reinforced the idea that losing other people's money is just fine, and you will never be forced to suffer and serious personal consequences, either financially, or even in terms of reputation.  Conventional bankers ruined conventionally can get a new lease on life by profiting from each other's ruined-ness.

Of course, the reason I repeat myself is because I consider this idea of mechanism-not-morals so important.  You can find perverse incentive structures all over the place if you look around.  Politicians want to get re-elected, and so have every incentive to write laws that better enable them to raise the funds to do just that.  Companies want to find some competitive advantage, and so have every incentive to get ahead of the competition by capturing the political process.  The military industrial complex wants to keep being the military industrial complex so they have every reason to want the country involved in a paranoid war against an unbeatable imaginary foe. 

All the conspiracy theories you've heard are true; you simply have to replace the nefarious central intelligence agency they implicate with a evolved mechanism for self-perpetuation.  Feedback loops don't stop on their own.  They feed back to the hand that bites us.

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