Mark Thoma: "John Bogles: 'A Crisis of Ethic Proportions'"

Mark Thoma reposted part of John Bogles' 'A Crisis of Ethic Proportions', which puts ethics at the front of the current economic crisis. Bogles goes on to identify the corrupted as the agents of the big corporations who put their own interest before that of the ones they are supposed to represent.

All very nicely analyzed. If you are an economist, you would really appreciate this effort of pinning down the real culprits within our theoretical system. Yes. The agency problem is well understood by economists, therefore solving it will not be that hard, once it is identified.

This identification, however, has slipped from Bogles' original point of observation. He effectively transforms a problem of ethics into one of agency, in which process an external factor of economic models is quietly internalized. Fortunately Mark Thoma is clear-headed enough to point out that '[r]ules will never cover everything, so ethics is part of the problem.'

However, my quesiton is, 'What ethics?'

I do not like to predict the death of capitalism like a socialist of the past. Observation is much better than prediction. Yet I believe that we have observed that people are not able to withstand the possible gains from bigger leverages, so much so that they and the huge organizations they represent will inevitably fall. It is the Gresham's law applied to the financial domain, and we seem to have got the problem back into the economists' hand. Congratulations! But do we have a stock solution?

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We have generally given up on 'good money' in currency circulation, but it is not possible to give in to 'bad money' in finance yet. While people were quick to realize the debased value of the 'bad' silver coins, the financial instruments are just too hard for the mortals to understand, and the rating agencies are doing a really evil job in offering (at least to Lehman) unfairly high ratings. So, once the complexity of the 'bad money' gets out of the limit of common human sensibility, all economic laws based on rationality need to be remade.