The Fed: from bad to worse instead of good to great
Yesterday at Austrian Economists, Pete was puzzled how the political rhetoric behind the financial crisis managed to wind its way around the topic of executive rewards. Some people were using the platform to voice concerns about wealth, greed and inequality. Not only are these huge companies failing, not only do hundreds of thousands of Americans appear to be on shaky grounds with regard to their mortgages and financial assets, but executives at some of these firms make really high salaries. Oh the horror, the horror!
Steve Horwitz awarded me victory of the thread for this comment:
Shouldn't we expect failing companies to desperately try to attract innovative and talented executives to implement desperate efforts at turning the company around?
This reminded me of a related point. While traveling last weekend the person next to me on the plane had Greenspan's new biography. When I saw it I immediately thought of a point from Jim Collins' From Good to Great.
Collins wanted to answer why some companies have done so well above average market returns for so long (sounds similar to "why some countries are rich and other countries are poor?"). His first intuition is to ignore leadership because if it all boils down to "you have to have Steve Jobs to make a profit" than there is no replicable advice for the marginal company. But even though he wants to avoid leadership he keeps coming back to it and recognizes a unique distinction. The companies that pull out as great have leaders you wouldn't think of as great. They're reserved, quiet, work-a-holic types, rather than larger than life Lee Iaccoca types.
Now the real point. Nothing speaks more highly to your specific contribution to a firm (rather than the stability and profitability of the firm itself) than the fact that it falls apart as soon as you leave. That's what came to mind when I saw the Greenspan biography.
Maybe that's what's happening in this financial crisis. If so we should interpret it as a sign of the broken nature of these financial institutions - specifically incentives for self-enforcing constraints. I'm not saying Greenspan was great but maybe he was better than the available alternatives and it's because of his own relative prudence and foresight that we've had financial stability in the past decades. But the institutions themselves and the incentives for financial intervention that they promote are messed up to the core. Now these gone things have gone to hell in a hand-basket.
We usually think that the worst tend to get on top but when someone marginally less than awful gets the job we should be careful not to confuse his quality with the quality of the system.