Where Is The Corruption In The System?

Perhaps the most perverse manifestation of the corruption in the system shows through in the area of executive compensation.

Whether it is absolute levels of remuneration/inurement or relative levels (vis-a-vis avg. compensation within a business), executive pay is out of whack with any sense of reasonableness. This is, of course, a broad brush to be painting with, and there are obviously many exceptions, but on the whole executive compensation is bananas.

Who's fault is it? Is it the government for not regulating such activities? Is it society/culture for tolerating such inequity? Is it greed and entitlement among the executive class? Is it the consultants who facilitate the game? Is it a principal-agent relationship gone AWOL? Is it boards stacked with management cronies? Is it institutional shareholders who have abdicated their stewardship responsibilities? Is it regular mom and pop shareholders who are too apathetic and complacent (or powerless)?

I dunno. I think everybody and everything contributes to the problem. But boy, does this description not also look and sound like the problems that led us into the financial crisis.

The failure of monetary authorities, perverse incentive structures imbedded in the system, facilitation by ratings agencies and regulators, greed of the investment banks and bankers, "all care and no responsibility" among mortgage brokers and securitizers, failure of moral courage among borrowers.

All of which begs the question, where is the outrage? or better yet, where is the shame?

Where There Is Smoke, There Is Fire

Excellent Weekend Interview in the WSJ, highlighting the rot (basically poor structure, corrupt practices, and perverse incentives...sound familiar) that exists within the US legal system ("He Fought the Tort Bar - and Won").

Given our recent experience of an unsustainable imbalance (financial crisis), it reminded me of the importance of identifying other areas in the system that are rotten. These will be ruled by Stein's law "if something can't go up forever, it will stop."

There is a price to be paid for corruption. And, there is a day of reckoning. Getting a handle on how and when it will play itself out is the hard part. But first you must identify where the problems lay.

Here are a few suggestions of unsustainable imbalances:

Political/democratic process and systems - perverted by money
Healthcare - perverted by vested interests
Tertiary Education - 10% pa inflation unsustainable
Defense spending - military/industrial complex + political ideology
Unfunded Entitlement Liabilities - self-evident
Fiscal Deficit, Current Account Deficit, Govt Indebtedness - not sustainable, but...

I think that each will have their "Minsky Moment" but the damage from their fallout, in most cases, will be less severe than an overly leveraged financial system (the multipliers there are huge).

I will talk much more about these things at another time, as well as possible ideas as to how each of their unravelings may play out.

P.S. While we are essentially on the subject of systemic risk factors, here are two other substantive risk factors with systemic possibilities - inflation and deflation. More on those at another time also.