erik lundegaard

The Tyranny of the Short Term

The best article I've read on the financial crisis was the second-most e-mailed article on the NY Times Web site yesterday. Today's it's the most e-mailed. It's by Michael Lewis and David Einhorn and it should be read by everybody. It explains the crisis in ways that even laypeople, of which I am hopelessly one, can understand. Some highlights:

Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest...

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate...

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it...

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda...

Read the whole thing. You get a sense that the people who are running our world are not the people who should be running our world. "The tyranny of the short term" is a phrase that could be used to describe almost every aspect of American life.

Worse: The things we did to wind up in this hole are the very things we're now doing to get us out of this hole.  We're relying on the same people. We're relying on the same institutions. We're trying to preserve confidence even when the confidence is false. 

Read the whole thing.


Posted at 09:04 AM on Mon. Jan 05, 2009 in category Politics  
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