a
useful article on market failure and pyramiding house prices
“ [...] If they gambled and won, they could walk away with
a share of the profits. If they gambled and lost, the investors
would bear the consequences. It was almost as if the entire financial
system was converted into a giant casino in which the system was
rigged to guarantee those running the games huge returns, at the
expense of the players [...] .”
—
“ Perhaps the worst problems--like those in the subprime mortgage
market--occurred when non-transparent fee structures interacted
with incentives for excessive risk-taking in which financial managers
got to keep high returns made one year, even if those returns were
more than offset by losses the next. Behind the subprime crisis
were mortgages designed to encourage repeated refinancing of homes--a
pyramid scheme that generated billions of dollars in fees for the
mortgage company as long as home prices continued to soar. It was
inevitable that the bubble would break. But, by then, the profits
that had been pocketed would make these financial wizards secure
for life--or, at least, that was their hope.”
The last paragraph would be better replaced
with one on proposed legal rules/sanctions. For example, much of bonuses
only paid after, for instance, five years.
[Linked by the Limbic
blog.]
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