Tunnelling

Via Atrios, an example of some of the problems with keeping existing managers and institutions in charge of our economy:

Bank of America vaulted into the top 10 banks for insider lending last year with an increase of more than $358 million, much of it coming as credit markets froze and mounting financial calamity threatened the industry’s survival.

For at least seven years, the bank’s quarterly insider lending never exceeded $300 million and was often less than half that. But by the end of 2008, it had jumped to $624 million.

This is Simon Johnson’s “tunnelling” “borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.”

It also reflects a kind of conceptual confusion that inflicts a lot of discussion of the economy. But businessmen are not Heroes of Capitalism determined to make as much money as possible through honest, mutually beneficial exchanges. Rather, they’re just greedy people who want to make money. Capitalism is about the idea that given a proper institutional structure, the impulse toward greed can be channeled into honest, mutually beneficial exchanges. But given an institutional set-up that creates the possibility of earning money by ripping off taxpayers, this is what a businessman is going to do. Not everyone is primarily motivated by greed (I know people who do things like volunteer for the Marines or try to earn a living painting)—but I think it’s fair to say that the kind of person who wants to become a bank executive is not driven by strong patriotic or artistic impulses, he’s trying to make money. And he’s probably pretty good at it!

A highly-performing civil servant at the FDIC is, by definition, someone who’s not particularly inclined to take advantage of opportunities to rip the taxpayers off. A highly-performing private sector executive or hedge fund manager, by contrast, is. So one cost that certainly arises as we try to rescue the financial sector primarily by funneling funds through private actors is that those actors aren’t going to be waking up in the morning to say “what can I do to make the economic recovery program a success.” They’re going to be waking up in the morning and saying “how can I put as much of this money as possible in my pocket.”