An interview with Warren Buffett worth watching
With the majority of the U.S. public against the $700 billion bailout plan, this interview with Warren Buffett is an interesting view from the other side of the debate.
My personal beliefs? I'll be the first to admit that in the short-term, I have no idea what's required to keep the economy from going over a cliff. But in the long-term, I feel strongly that substantial work needs to be done to rework the incentive systems at the heart of the financial industry.
For example, it's amazing to me to read story after story about home buyers who were essentially setup for failure with their loan. Yes, they signed the paperwork and they deserve their share of the blame (and financial punishment), but what about all the experts who enabled them? What about their realtor? What about the loan officer? Because realtors and loan officers are rewarded when a transaction happens, they're incented to make as many transactions happen as possible, without regard for the borrower's financial well being. This doesn't mean that all realtors and loan officers disregard their customer's well being, but enough did it to get us into this mess.
Random idea: instead of giving people huge amounts of $$$ when a transaction happens, what if things went to more of a royalty system, like how musicians make money off of songs. Say a realtor makes $10,000 off the sale of a home. Instead of getting all that $10,000 right away, perhaps they get $2,000 and the remaining $8,000 is paid out gradually over 10 years, but only if the homeowner doesn't default on their loan. If the homeowner defaults, the realtor loses the remaining commission. If the homeowner moves to a new place, the realtor is guaranteed the rest of their $8,000, but it's still paid out over the 10 year schedule.
Same system for the loan officer.
An alternative system would be to fine realtors and loan officers if a person they put in the home defaults on the loan. The fine needs to be big enough to hurt, but not big enough to financially ruin someone (unless you put a ton of people in homes they shouldn't be in). Sure, there will always be some number of defaults for reasons outside of the control of the realtor or loan officer, but I'd argue that's part of the costs of doing business.
In a nutshell, the interests of the homeowner need to be more tightly aligned with the interests of the realtor and the loan officer.
Going broader, it would be great if we could find a way to align the interests of individuals in the financial trenches with the interests of the overall U.S. economy. I wonder how many Wall Street employees are out there who got in, did a ton of transactions, and got out with several million dollars. They're all out there laughing at the rest of us as the system melts down. Did you know the average employee compensation in 2006 at Goldman Sachs was $622,000? (The median would be a better measure here, but no one seems to have that number.)
If you're making that kind of money, and the decisions you're making are setting up the U.S. economy for the painful position it's currently in, something is fundamentally wrong with the incentives at the heart of the system.
My personal beliefs? I'll be the first to admit that in the short-term, I have no idea what's required to keep the economy from going over a cliff. But in the long-term, I feel strongly that substantial work needs to be done to rework the incentive systems at the heart of the financial industry.
For example, it's amazing to me to read story after story about home buyers who were essentially setup for failure with their loan. Yes, they signed the paperwork and they deserve their share of the blame (and financial punishment), but what about all the experts who enabled them? What about their realtor? What about the loan officer? Because realtors and loan officers are rewarded when a transaction happens, they're incented to make as many transactions happen as possible, without regard for the borrower's financial well being. This doesn't mean that all realtors and loan officers disregard their customer's well being, but enough did it to get us into this mess.
Random idea: instead of giving people huge amounts of $$$ when a transaction happens, what if things went to more of a royalty system, like how musicians make money off of songs. Say a realtor makes $10,000 off the sale of a home. Instead of getting all that $10,000 right away, perhaps they get $2,000 and the remaining $8,000 is paid out gradually over 10 years, but only if the homeowner doesn't default on their loan. If the homeowner defaults, the realtor loses the remaining commission. If the homeowner moves to a new place, the realtor is guaranteed the rest of their $8,000, but it's still paid out over the 10 year schedule.
Same system for the loan officer.
An alternative system would be to fine realtors and loan officers if a person they put in the home defaults on the loan. The fine needs to be big enough to hurt, but not big enough to financially ruin someone (unless you put a ton of people in homes they shouldn't be in). Sure, there will always be some number of defaults for reasons outside of the control of the realtor or loan officer, but I'd argue that's part of the costs of doing business.
In a nutshell, the interests of the homeowner need to be more tightly aligned with the interests of the realtor and the loan officer.
Going broader, it would be great if we could find a way to align the interests of individuals in the financial trenches with the interests of the overall U.S. economy. I wonder how many Wall Street employees are out there who got in, did a ton of transactions, and got out with several million dollars. They're all out there laughing at the rest of us as the system melts down. Did you know the average employee compensation in 2006 at Goldman Sachs was $622,000? (The median would be a better measure here, but no one seems to have that number.)
If you're making that kind of money, and the decisions you're making are setting up the U.S. economy for the painful position it's currently in, something is fundamentally wrong with the incentives at the heart of the system.
I think this is a great idea. The mere mention of management of incentives, though, woudl be seen by some as capping capitalism - and perhaps even as socialism. I find it fascinating - and not in a good way - that merely building checks and balances int oa system is often seen as government interference, when it's obvious that if they're not there, government will have to intervene eventually anyway.
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