Some interesting excerpt from this interview with Wilbur Ross on incentives, regulation, and noise in decision making.
How can we fix the securitization market?
No one had skin in the game. That's where things went wrong. My proposal then is that everyone has skin in the game. Ratings agencies' fees and compensation should be paid over time and depend on the enduring quality of the rating. Employees at banks and brokerages should have their compensation tied to the long-term success of their products. If a trader is paid a big bonus for a portfolio that turns out to be a disaster a year later, did he really earn the money he was paid?
What are the big challenges for investors now?
Government intervention is one. Washington, D.C. is the new Wall Street. No significant financial transaction of any consequence occurs without it. About 90% of all mortgages are granted through Washington. Health-care reform would mean another 16% of the economy under more government supervision.
But there is no evidence that more regulation makes things better. The most highly regulated industry in America is commercial banking, and that didn't save those institutions from making terrible decisions.
The relationship between information and decision-making is a challenge. Everyone gets the same information at basically the same time, so the value of information has gone to zero. And there has not been proportionate growth in the investment community's ability to sort through it all. People spend so much time absorbing that they don't have time to understand what it means. This creates volatility.
For example, people suddenly decide Greece is the problem, and whack, the market is down 10%. If weeks from now people decide California is the problem, markets will move again. Everyone has known for over a year that both places are troubled. Why do we care now? How do we know that the problems of Greece or rescuing that country will make a difference in the economic landscape one way or the other?