Monday, April 12, 2010

But the pension fund was just sitting there

The reason for the narrowly averted banking collapse of 2008:

[E]ven when banks can fail, bank managers and/or owners have an incentive to make risky bets; after all, their downside is limited — at worst, the bank goes under — while their upside isn’t: if they can earn high profits for a few years, they can walk away with a lot. Remember that in the S&L crisis of the 1980s, quite a few people made out like bandits while running their banks into the ground.
The simple fact is that unfettered markets have no reliable mechanism to align the timing of rewards with the timing of risks. That lack leaves inevitable opportunities to profit individually from disastrous debt overhangs that hurt the rest of us.

Updated (8/6/2010) for clarity of the last paragraph.

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