Cognitive Capture

I very much liked this Michael Lewis quote in an interview with Christopher Lydon:

Lewis: “The people who were responsible for orchestrating the crisis, because they’re on top and they’re in the middle of it, they’re the only ones who are sort of fluent in the language of it. I mean, who’s to question Tim Geithner, the secretary of the treasury, about this or that, because he’s the only with the information . . . even though he is clearly culpable in what happened.”

Lydon: “Not to mention Larry Summers and Bob Rubin and all the other architects of the deregulation. They’re still calling the shots in a new administration after a change of party management. It’s unreal.”

Lewis: “It is unreal, because basically all of the people you mentioned all swallowed a general view of Wall Street, which was that it was a useful and worthy master class, that these people basically knew what they were doing and should be left to do whatever they wanted to do. And they were totally wrong about that. Not only did they not know what they were doing, but the consequences of not knowing what they were doing were catastrophic for the rest of us. It was not just not useful; it was destructive. We live in a society where the people who have squandered the most wealth have been paying themselves the most, and failure has been rewarded in the most spectacular ways, and instead of saying we really should just wipe out the system and start fresh in some way, there is a sort of instinct to just tinker with what exists and not fiddle with the structure. And I don’t know if that’s going to work.

I think that's pretty accurate, and it is echoed in the "scandal" around Goldman's double dealing wrt to Magnetar.

I think the general reaction to the SEC charge against Goldman Sachs is "at last". I'm not sure how many people understand the fraud, or its importance, but just as they caught Al Capone on tax charges, I'm sure they just want GS caught on something.

To me, the bigger issue is how far the financial industry has drifted from its primary purpose: to make loans that get paid back. The pay practices at banks, where you get paid when the money goes out, not when it comes back in; securitization in general; CDS and various other "hedging" strategies; third party ratings agencies; all of them are contrary to focusing on credit risk which is the entire reason we have a banking system in the first place.

Instead of tinkering with this system around the edges, we should take a "spike on the steering wheel" approach and have a banking system that makes loans, keeps them on its books until it matures, and lives or dies by the quality of its credit assessments.