Monday, October 06, 2008

Misbalanced incentives....

I continue to watch this financial crisis with morbid fascination. What amazes me is that the incentives to take crazy risks that impact others was so baked into the system. Regardless of the risk I take, I can win out big or at least do ok. But if I win I make out like a bandit. So the executives at Wall Street's firms knew the leverage was OK, from their perspective.

I worry that this is part of our rush to nuclear and other solutions. Executives authorize pollution, we do remember watching "Erin Brockovitch" right? Because they can walk away. We need to work with safe technologies and reductions to deal with global warming. I can guarantee you that if nuclear is approved in the current climate, the executives will be living nowhere near the reactors. You and I will.

As long as upside and true downside for executives are not aligned, the agency problem is going to be gigantic. The only way to ensure that an executive will run a company is well, is that the executive needs to depend on the company to exist for his or her paycheck tomorrow and that they need that paycheck.

This economic clusterBLANK has messed up our money, if we don't address this for the way companies run, it'll be our health (or already is with the Melanine scare -- and note, we have our own scandals here in the U.S. e-coli anyone?)


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