When your partners are crooks, but it’s too late to leave the game by mattsteinglass
March 6, 2009, 8:41 am
Filed under: Uncategorized

I love it when people use clever citations from famous lyrics as blog post titles, but unfortunately the above line is from the song “Without Women” by the great early 20th-century Russian cabaret artist Alexander Vertinsky so the reference probably doesn’t seem witty to anyone but me. It’s a gorgeous song, though, light and humorous with tinkling piano. “How nice to be without women, without words…” One of those ironic songs fantasizing about how great it would be to forget about women and just hang out with the guys, drinking whisky and talking about…women. Vertinsky wrote it while living in Shanghai’s Russian exile community in 1940. The particular line comes from the bridge:

And how silly the absurd game looks
with its vast losses and trifling gains
when your partners are crooks
but it’s too late to leave the game

Translation copyright me, just now.

So where was I? Actually this was supposed to be a post about an interesting suggestion Megan McArdle made yesterday that banks be forced to operate as partnerships rather than public corporations. This, she notes, would help combat the “too big to fail” problem since such entities would be unlikely to grow past a moderate size, and it would reduce perverse incentives by bank officers to take risks which may result in catastrophic medium-term losses for the banks but are guaranteed to generate big short-term paydays and bonuses for themselves. Those perverse incentives figure prominently in Jesse Eisinger‘s recent post on Slate arguing that the financial crisis probably stemmed from criminal fraud to a much greater degree than most people are willing to acknowledge.

They also bear on another question that’s come up repeatedly on Megan’s blog, which is the issue of whether borrowers or lenders are more likely to be at fault for the massive default rate. Matthew Yglesias has argued that lenders are professionals and should be held responsible for failing to recognize that people with no income and no assets should not receive $350,000 mortgages, while the borrower is likely to go with the flow and figure that if a professional tells them it’ll work out, it will probably work out. Megan argues that lenders are at a disadvantage because they don’t know the true state of the borrower’s finances, and they’re the ones putting out their money. But the key middle step here is that the actual people making the loans at many mortgage institutions over the past few years were employees who had no real loyalty to the financial institutions they were working for and who benefited from selling or approving loans, not from denying them. And ultimately this structural imbalance of responsibility goes back to the nature of the limited-liability corporation, which is basically a device through which the state encourages people to take on debts they can’t necessarily pay back in order to generate economic productivity. It makes sense that in cases where that structure seems to be generating pointless risk rather than productivity, the legal structure should be eliminated and people should just have to operate as partnerships the way they did before those crazy Dutch invented the corporation, shortly before they all bankrupted themselves buying thousand-guilder tulips.

Here’s that Vertinsky song, recorded I think near the end of his life in the ’50s when he had moved back to Russia.


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