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Friday, March 29, 2024

New York Fed Official Says Incentive Pay Fueled Credit Crisis

Courtesy of Econophile

Ack! Where do they get these people:

Thomas Baxter, general counsel of the Federal Reserve Bank of New York, said Saturday that incentive compensation fueled the global credit crisis and there is a need for greater loan discipline.

 

“Incentive compensation can and has led us into temptation,” and is one of the causes of the financial crisis, Mr. Baxter said. It “put people into loans they shouldn’t have had at all.”

 

Baxter, speaking at the ninth Harvard University Forum on Islamic Finance held at the university’s law school, noted that U.S. lenders were given incentives to put consumers in more costly, riskier mortgages that they didn’t require. Securitizing those loans and selling them off also contributed to the financial crisis.

 

Mr. Baxter called for greater discipline and prudence across the global financial system to prevent the next financial crisis from being as severe.

 

The credit crisis sparked by consumers’ inability to make mortgage payments that suddenly ballooned on a wide scale about three years ago dried up liquidity in the U.S., producing shocks that continue to ripple around the world. …

 

Mr. Baxter also said that Senate Banking Committee Chairman Christopher Dodd’s (D.,Conn.) financial reform bill demonstrates the need for legal principles that are consistent with ethical behavior in the financial world.

Because the Daily Capitalist has high journalistic standards, I won’t swear or throw things at my monitor. But this guy has absolutely no clue what happened. He must assume that all you need to do to start an international credit induced recession is to give high monetary incentives to the participants and off it goes.

He might just ask how all this stuff got started. He might just look at his own playpen and question the frenzied money pumping of Chairman Greenspan, the lax underwriting rules endorsed by Fannie and Freddie, Dodds and Frank, the Freddie and Fannie loan guarantees, FDIC bailout/moral hazard, and the inept models used at the Fed and Wall Street to evaluate market risk.

It’s like saying greed is responsible for the crisis, ignoring the fact that greed always exists in the world of human activity.

Think, man, think!

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