What do financial reform and health care reform have in common?

Consider both the financial reform and health reform proposals on the table. Both contain many changes and every detail has been hotly debated. But these changes tend to be on the margin and may or may not produce positive effects. At this point in fact they look to have little impact because the fundamental institutions that need reform are not just preserved but further entrenched.

The health care reform maintains the principal features of our existing insurance system and pulls in additional payers to spread the cost. That works out well for insurance companies who get more premiums but what about the public? It’s not cynical, nor is it without precedent, to predict that changes at the margins won’t significantly alter a bloated, broken system. The problem in health care is not only that millions of Americans don’t have health insurance. It’s that the current system of health insurance doesn’t work very well at all. Think of enormous premiums, low coverage and poor quality of services. Surely more of the same is not the answer. And in the case of financial reform, the proposals on the table also boil down to more of the same. Financial institutions will remain quite free to take excessive risks with other people’s money and the public will remain obligated to pick up the pieces.

Let’s stop pretending that these so-called reform acts represent important changes in the public interest and acknowledge what’s really going on; continuing protection of corporate interests disguised as reform. In essence both sets of policies look like they will end up feeding our flawed institutions while the public hopes for scraps.

Pigs at the Trough

Some thoughts about executive pay; and in particular about banker pay. Landon Thomas had a nicely written piece in yesterday's NYT wherein he related a telling response from Robert Diamond, Barclays’ head, as to why he was paid so much ($22 million in 2008!). Three reasons: first, I’m senior; second, I did deals that “transformed” the bank; and third, I am entitled to benefit together with everyone else from the financial system.

Which leads me to the following thought experiment. Why is it, exactly, that bankers can be worth so much? They don’t invent the wheel, after all; they lend money or, perhaps more typically in the world of high finance, they promise to pay over money under certain conditions which may or may not occur. So why are the individuals so valuable? Well, it could be that they have secret knowledge of proprietary “products” or methods or inside information that the rest of the market doesn’t have and that customers are paying enormously for. But does that seem very likely?

Isn’t the real reason they get paid because of their “relationships”? But think about that for just a second. What is a relationship, after all? Isn’t it an arrangement of mutual benefit? So if a CEO wants to deal with a banker (or institution), and we all know he has practically equivalent choices at many banks, what is the mutual benefit? Perhaps we should be looking for the quid pro quo that is virtually certainly there. Remember that CEO’s don’t cut the mustard unless they are “trusted” by Wall Street. And how, exactly do they earn that trust? Not by sticking their finger in the eye of bankers, that’s for sure. Doesn’t it look a bit like a mutual payola deal, where overpaid bankers assure the hiring of overpaid executives, and vice versa. Could that be what they really mean when they champion the so called free market?

I have no problem with executives getting paid very well for creating long term value. But anybody who does a deal and then claims a bonus is just a glorified pirate, as it will be years and years before the true success or failure of any deal becomes apparent, and as those in the business can tell you it requires the efforts of many people over many years to achieve that success.

First Post!

I’ll kick off this blog by telling you what to expect. I took the plunge last week with my first blog post on the Huffington Post. I love to produce analysis and think pieces on the economy and my formal work will be found on the Huffington Post and in other publications. My blog will be more informal. I’d like to include interesting facts and ideas about the economy and policy as well as input from economists, academics and policymakers who are wrestling with important issues. With a little luck some of what you read here will inspire you, or provoke your own thinking.

The Economics of Integrity

Through her colorful—and often surprising—stories (examples range from pouring milk on your corn flakes to international gold trading) the acclaimed journalist takes us on a journey that reveals the deep layers of trust involved in even the simplest of transactions and how our stock in integrity is our most valuable economic asset.

A big idea book with the entertainment value of Predictably Irrational, it also sheds light on our current economic crisis and the inner workings of global financial markets.

Beginning with things we take for granted in our daily lives—milk, money, and markets—this book shows how much we depend on and benefit from integrity.

Through the eyes of Toyota, the number one carmaker in the world, we learn how integrity is an investment with a financial payoff and through the experience of successful start ups like eBay and Amazon we can understand how integrity is built up over time.

Not only does this book reveal how integrity is an important source of our prosperity, but it also lays out a system for how to generate more integrity and more wealth. Bernasek explains the DNA of integrity and reveals the key building blocks of disclosure, norms, and accountability. This book isn’t just an interesting read about the way global markets really work.

It also delivers clear and practical steps to building a stronger economy based upon trust that will benefit everyone. The Economics of Integrity offers a bold new way to look at our economy; this is a book for our times.