Sunday, April 11, 2010

One Word, Five Letters

Greed is the cause of many of the problems in the world.

Billionaire George Soros believes that markets are bubble prone. I guess the fact that he's a billionaire gives him some credibility. In his article in "Financial Times" in June, 2009, Soros says:

. . . markets are bubble-prone, regulators must accept responsibility for preventing bubbles from growing too big . . .The efficient market hypothesis postulates that markets tend towards equilibrium and deviations occur in a random fashion; moreover, markets are supposed to function without any discontinuity in the sequence of prices. Under these conditions market risks can be equated with the risks affecting individual market participants. As long as they manage their risks properly, regulators ought to be happy.  But the efficient market hypothesis is unrealistic. Markets are subject to imbalances that individual participants may ignore if they think they can liquidate their positions. . . .

In short, greed can short-circuit market corrections. Greed can cause usually sane people to ignore what they see in front of them for the benefit of short-term gain. Greed can cause a lender to create a loan which allows people to get into houses that they can't afford and it can cause those same people to ignore the fact that this is too good to be true.

People have short-term incentives to make lots of money quickly and not worry about the long-term effects of what they are doing. This incentive structure seems to reach from the CEO to the trader on the floor to the stock owner and, by extension, to the politicians who should be regulating them.

This American Person feels we need to break that cycle. We need to realize that the natural tendency toward greed, but that greed will bring this nation down if it is allowed to run rampant as it has since Reagan took office. We need to incentivize the CEO's, and the politicians they support through their political contributions to consider, not their short-term gain, but the long-term benefit to the nation of their actions.