Goldman Sachs

Instapundit.com:

PROFESSOR BAINBRIDGE: “It was inevitable that the government would go after one of the big investment banks for their conduct during the run up to the credit crisis. Someone must be thrown to the lions so that the polis are distracted from the role their government played in the fiasco.”

By its system of taxation, regulatory regimes, etc., Government creates the incentive structure within which firms operate.

Bad incentive structures eventually produce bad behavior. Film at eleven!

Somebody on the radio today was arguing that Wall Street changed in a fundamental way when the big investment houses stopped being partnerships, where the partners' personal fortunes depended on the firm's success. Instead, they are now publicly-traded, owned by stockholders, with management receiving astronomical pay and enormous bonuses, delivered on a seemingly non-contingent basis.

So instead of having their own money at risk, management gets incredibly rich by risking other people's money with little or no penalty for losing it, however irresponsibly. To that add competition, greed, and Government incentives that promote irresponsibility, as in the sub-prime mess, and you have what anybody should recognize as a fool-proof prescription for financial meltdown.

What I can't come up with is any even vaguely plausible scenario where that set of incentives could lead to anything but disaster, which of course it did. The complete disregard for common sense here is very discouraging.

Byron