Unfortunately, firms covered by government guarantees are not the
only ones that face severely distorted incentives. Looting can spread
symbiotically to other markets, bringing to life a whole economic under-
world with perverse incentives. The looters in the sector covered by the
government guarantees will make trades with unaffiliated firms outside
this sector, causing them to produce in a way that helps maximize the
looters' current extractions with no regard for future losses. Rather than
looking for business partners who will honor their contracts, the looters
look for partners who will sign contracts that appear to have high current
value if fulfilled but that will not-and could not-be honored.
This is from an old
paper from 1993, but it could have been written just the other day. From real estate agents, bank loan officers, rating firms to investment bankers, they are all guilty of fraud and looting! There is no doubt that banks knew what they were doing—no doc loans, loan fabrications, securitizations of known worthless shit, AAA ratings on complete garbage, etc, etc! If we listened and believed all their lies about how it was the perfect storm and there was no chance to foresee the collapse of the financial industry, we are the fools! The shocking thing from the crisis that continues to this day, for the past 3 years, is that no one is being held accountable. At least when the savings and loan scandals took place in the 80's people were held accountable and went to jail. In this latest case of institutional fraud and looting the government bailed them out, made many of the perpetrators whole and just moved on. I think we are getting the government that they paid for, through lobbyists, and that we all literally pay for in the end.
