Bair says she's still seeing what she calls "short-termism," which could also be called instant gratification.
While short-termism on Wall Street and in Washington was a huge driver of the most recent financial crisis, we all fall prey to this tendency to some extent.
Households have failed to save enough money to carry them through hard times or to achieve long-term goals. It became old-fashioned to save up for the down payment on that first home. Taking out a mortgage shifted from the most serious financial decision a family would make to a speculative bet on how far home prices would rise. Homeownership went from being a source of stability in our economy to a source of instability.
Business executives squeeze expenses of all types to meet their quarterly earnings targets, even cutting research and development that could create a competitive advantage down the road. This market failure leads to under-investment in projects with long payoff periods. “Patient capital” has become almost quaint.
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Mortgage brokers and the issuers of mortgage-based securities were typically paid based on volume, and they responded to these incentives by making millions of risky loans, then moving on to new jobs long before defaults and foreclosures reached record levels.
Such arrangements gave rise to the acronym IBG-YBG(“I’ll be gone, you’ll be gone”), a watchword for short-termism in the mortgage industry during the boom.
When the housing bubble burst, home values started to fall and adjustable-rate loan payments ratcheted upward, and subprime borrowers began to default in record numbers. But the inherent short-termism of bankers and policymakers kept them from moving quickly to limit the damage as the financial crisis escalated in 2007 and 2008.
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Our loophole-ridden tax system — which favors spending over saving, debt financing over equity, and homebuilding over other long-term investments — is badly in need of an overhaul as well. Closing loopholes would result in a more efficient allocation of capital and would allow us to reduce marginal tax rates while raising more revenue to help pay down our national debt. But most of us would have to give up some of our deductions and tax credits in the short term. Read it all
