Around 25 years ago, American business - and the American political system - bought into the idea that greed is good. Executives are lavishly rewarded if the companies they run seem successful: Last year the chief executives of Merrill and Citigroup were paid $48 million and $25.6 million, respectively.
But if the success turns out to have been an illusion - well, they still get to keep the money. Heads they win, tails we lose.
Not only is this grossly unfair, it encourages bad risk-taking and sometimes fraud. If an executive can create the appearance of success, even for a couple of years, he will walk away immensely wealthy. Meanwhile, the subsequent revelation that appearances were deceiving is someone else's problem.
If all this sounds familiar, it should. The huge rewards executives receive if they can fake success are what led to the great corporate scandals of a few years back. There's no indication that any laws were broken this time - but the public's trust was nonetheless betrayed, once again.
The point is that the subprime crisis and the credit crunch are, in an important sense, the result of our failure to effectively reform corporate governance after the last set of scandals.
~ Paul Krugman, "Krugman: Banks Gone Wild," International Herald Tribune, November 23, 2007