People are, by definition, influenced to do something by incentives, and influenced against doing things by disincentives. As these NYT Op-Eds demonstrate, last year’s financial system series of collapses and crises came about basically because everyone was incented to take larger and larger risks and nobody was disincented … because the prospective disincenters (e.g., the credit rating agencies, the federal oversight organizations) were themselves disincented from doing anything about it.
Everyone had everything to gain from shutting up and throwing another quarter into the slot machine (or not saying anything when everyone else did), and nothing to lose by letting it go on.
Until we all lost, of course.
The End of the Financial World as We Know It – NYTimes.com
How to Repair a Broken Financial World – NYTimes.com
The most coherent description of how things went south I’ve seen, and the best suggestions for actually doing something about it (Rule #1 – When you are in a hole, stop digging).
Required reading (not something I say lightly).