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MLB & Banks: Broken Systems

Friday, February 13th, 2009
Posted in Education by Joel Gross

Criticism has been heaped upon both bankers and baseball players in the last couple of years.‚  Bankers destroyed their companies, hurt shareholders and helped send the American economy into a recession.‚  Baseball players used steroids, HG and other drugs harmful to their bodies and set a bad example for everyone else.‚  I agree that what these people did is wrong, but I do not think that they should be blamed.‚  The baseball players and the bankers were both doing what was in their best interests.‚  The systems that they operated within were broken because the incentives in place were poorly thought out and led individuals to make harmful decisions.

In baseball, professional players are paid directly in accordance with how well they perform regardless of what they do to achieve that performance.‚  Within their incentive system, the more hits and home runs they gained, the more money, fame and job security they achieved.‚  For instance, Barry Bonds, previously a decent player making decent money took steroids and made himself one of the richest and most famous players ever to hit a ball.‚  If you asked him or most other players if they would do it again, most of them would say yes in an instant.

Bankers are in a similar situation.‚  They were operating within a broken system of incentives to sell as many mortgages, CDOs and other seriously flawed securities as possible without regard for risk.‚  Most of these guys were highly intelligent and recognized that they were building a house of cards that would collapse, but they also recognized they could make tens of millions of dollars apiece along the way.‚  Now, the U.S. economy is in a recession, but the bankers are sitting on huge piles of cash in Hawaii, Cancun or Whistler.‚  Most of them would do the same thing again with full knowledge of the consequences.

Even if some of the current baseball players or bankers would not do it again, there definitely would be somebody who would fill their shoes.‚  Probably a giant line of people.‚  I personally would take either of their places with full knowledge of the consequences: I get extremely rich and some people don’t like me.‚  Most of the people I know would do the same thing.

How do you prevent people from taking actions harmful to themselves or others?‚  Build systems that work.‚  Set up incentives that keep people honest.

In baseball, you simply write contracts so that if a player is found to use performance enhancing drugs he is kicked out of baseball forever and can be sued for twice the amount of money he ever earned in baseball.‚  No player will risk losing everything and living in poverty for the rest of his life by taking banned performance enhancing drugs.

In banking, you hold the senior bankers and executives financially responsible to shareholders for losses.‚  No banker will risk losing billions of dollars in shareholder value if she knows she will lose everything she’s ever earned.

Why aren’t these systems already in place? Major League Baseball is a taxpayer-subsidized monopoly that doesn’t really care one way or another about whether players take steroids as long as it maximizes its profits.‚  In the finance industry, shareholders have limited rights and powers so a “good ol’ boy” network has developed between top bankers and executives where they award each other obscene compensation packages with no strings attached.

How can both broken systems be fixed? Give shareholders back the ultimate authority and power in business as well as a very strong set of shareholder’s rights and voting powers over major issues like compensation.‚  In baseball, remove all taxpayer subsidies (stadiums, etc.) and the monopoly rights of the MLB organization in order to give power back to the fans.