Monday, September 28, 2009

Pittsburgh Summit and Beyond: Are the Proposals to Regulate the Financial System Justified?

Leaders at the G-20 summit at Pittsburgh issued a statement endorsing the idea of greater regulation of executive compensation. The idea is that high executive pay not tied to performance was an important reason for the present financial crisis. There is an entire paragraph on this from which I offer a short excerpt here:

Reforming compensation practices to support financial stability: Excessive compensation in the financial sector has both reflected and encouraged excessive risk taking. Reforming compensation policies and practices is an essential part of our effort to increase financial stability....

Another element of reform suggested was strengthening the Basel II Capital Framework. The Hindu appears to editorial has this to say:

Take regulation and risk. If national governments do not implement the excellent recommendations made by the G20 on bankers’ pay, transparent accounting procedures and prudential banking norms, financial markets will once again start indulging in risky behaviour.

I have not studied this issue in a lot of detail but will point to some articles that present a contrary view that appears quite compelling. See this article in the New York Times which draws on two recent studies to explain why there is little evidence to believe that bankers' pay contributed to this problem and suggests that greater risk aversion among bankers might have actually made things worse than they are. Jeff Friedman makes an interesting set of arguments in this post and this article critiquing Posner's recent book on the subject. In the latter, he argues that the skewed incentives created by the regulatory framework based on the Basel Accords were primarily to blame for the crisis.

5 comments:

Aryan Culler said...

Your hyperbolic hypotheses always amuses me no end. Though commendably researched, your article ends up as a nauseating waste of time. A classic example this. The opinion starts with how the G20 Leaders are incorrectly endorsing 'greater regulation' and ends with agreeing the 'regulatory framework' needs to changed. LOL.
Yes, That means that the reglulations need to changed. The first step has perhaps unconvincingly been decided as executive pay. The deficiency of a better starting point indicates your correct awareness of a lack of knowledge on the topic. Please attempt to string more coherent arguments in the future.

I, Me, Myself ! said...

Aryan Culler is back, to "amuse" us further! :)

Would you kindly explain this statement, "...indicates your correct awareness of a lack of knowledge on the topic". How can lack of knowledge contribute to correct awareness? Your riddle is more difficult to solve than the World's financial crisis :D.

Actually, I think the bankers also had exactly the same "clarity of thought" that AC has, and hence the mess around us :).

And about the actual topic, well, I am a little poor in this subject, so can't really add much to what has been written. Couldn't resist from writing after seeing Aryan Culler's comment!

- Sudhir

Anonymous said...

arbitrary argumentative abominable aryan assailing without assimilating

Xinhua Ram said...

Where did you drop from, Aryan Culler? Where were you lurking all along? You talking of hyperbole, isn't that amusing?

Pilid said...

Thanks folks for all your comments. Sudhir, that was really funny :).