The financial bill, despite the hype, will not be able to avoid another foreclosure-like crisis. There is a general agreement among all sections of experts that the wrong type of incentives result in crises. They are also in one mind about the fact that incentive structures of the finance industry have for a long time been perverse. This is the view of economists, criminologists dealing with white-collar offences and financial regulators.
The Obama government claims that the reform bill relating to finances that will be inked into law by the President soon will put brakes on similar crises in the future. It will however not be able to do so because the root problem of these perverse incentives have not been properly addressed; rather there is the danger of further accounting related scams – the very cause of payments from perverse incentive.
With the passage of time the severity of the crises have gone from bad to worse because many of the policies attempting reform, have unintentionally encouraged these types of incentive frameworks. The compensation carrot dangled before the executives and professionals create the perfect breeding ground for generating motive while steps like de-regulation, lax supervision and “black holes” in regulations provide the best opportunities.
The CEO picks up his “weapon of choice” – accounting. This weapon changes the perverted incentives into the inevitable disaster – there is the motive, there are the means as well as the opportunities.
The bill fails to tackle the trouble coming from the compensations being paid in modern times to executives and other professionals although facts and figures show that it is these compensations that are the main reasons behind the Great Depression. The proportion of compensation given to compensation that related to short-term income that is reported, has gone up since the time of the crisis as per an independent research carried out by James F. Reda & Associates. Accounting is the “sure thing” for creating whatever income for the short term the big executives want to report.
Compensation being made out to professionals has become a widespread danger and none who claim to be honest can deny it. The CDOs that were not worth even a single ‘C’ rating were given AAA stamps. The lawyer would structure the CDO in this way and auditors, both internal and external would have nothing to complain. These mortgages rested on many faceted scams indulged in by the professionals.