Thursday, October 23, 2008

It's Time to Revive Shame Punishment

While I'm not willing to say that capitalism is dead, it's clear that the last several months have delivered a mindbendingly huge blow to the notion that in efficient markets, people act in their own interest and that markets will regulate themselves. The system totally and utterly collapsed, and now the American taxpayer is being called upon to guarantee loans, in the form of T-bills, to shore it up. This is, without a doubt, a brand of socialism. And it is hugely, hugely embarrassing. And we need to own up to it.

The US Congress has been putting on a parade, calling forth Fuld, other imbeciles, and now Greenspan. Their mea culpas, excuses, explanations, and prevarications have all been crap. We need a real cleansing of the system. We need to revive shame punishment. Put these guys in the stocks in the town square. Let's name the hundreds of guys who managed the fixed-income desk at Merrill and Morgan. Letting everyone slide is not gonna help.

White collar criminals have historically shown that the threat of fines and imprisonment are not a sufficient deterrent. But shame is. Puritan Massachusetts got a lot of mileage from shame punishment. It costs the public purse nothing to put someone in the stocks, and it's a hugely effective deterrent.

The Japanese took a long time (in terms of regulation and guidance) to turn themselves around, but they did, and they made realistic and stable and steady gains. They learned once again to fear debt and embrace transparency. But first, they embraced shame and public humiliation. For comparison, let's look again at the bosses of the failed Nippon bank in 1998, and Fuld several week ago and Greenspan today, both testifying before Congress.