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Must-read. Seminal paper on moral hazard: Looting

This fantastic quote from the 1996 paper Looting by George Akerlof and Paul Romer describes the economic underpinning ("moral hazard") that created our current financial crisis:

"…the normal economics of maximizing economic value is replaced by the topsy-turvy economics of maximizing current extractable value, which tends to drive the firm's economic net worth deeply negative. Once owners have decided they can extract more from a firm by maximizing their present take, any action that allows them to extract more currently will be attractive--even if it causes a large reduction in the true economic net worth of the firm.  A dollar in increased dividends today is worth a dollar to owners, but a dollar in increased future earnings is worth nothing because future payments accrue to the creditors who will be left holding the bag."

The paper was a study of several economic crises of the 1980s, but totally nails current problems.  If only policy-makers had paid attention!  (They still can!)
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I experienced this firsthand in the 80s and early 90s.  I worked for a company that was acquired by a VC firm.  The buyer stripped off the most valuable assets and sold them, then sold us to someone else.  Rinse and repeat until there's nothing left. 
"current extractable value" - great phrase. It's to the point that acting with the long term in mind is, in practice, considered a dereliction of a public company's fiduciary duty.
There must be incentives to work for sustainable wellbeing, whether of people, corporations or countries, the philosophy of Buy-Now, Pay-Later is just not working.
Except that this type of thinking has been documented since before Roman times, it shows one of the problems in letting only the rich run the financial system.
"current extractable value" sounds like the center of Romney's dartboard while he was at the helm of Bain.  Probably still is, although he's no longer targeting corporations, but countries.
I think the nature of stock markets is that there is a high incentive to 'make money now'.  But the thing that invariably kicks that incentive into overdrive is when an opportunity to game the system arises.  It could come from de-regulation, it could come from a new fraudulent scheme being discovered, or it could be from the computer war of automated trading.

Whatever the cause, when you have one or more of these factors in play, all of the players become desperate to make as much money as possible before it all comes crashing down.  Even if you're a sensible player it's easy to get swept up in the massive short term profits.  And that's assuming that a significant number of people in the market even know or have thought about the fact that it won't last.  A lot of times people don't.

This is exactly what happened with real estate.  Millions of people were operating on the premise that 'real estate always go up', so the frenzy kept increasing even when prices rose above reason. 

Unfortunately I don't think the government learned much this time, much less has the political will to act against these situations in the future.
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