The CEO Asset Bubble

Reading some economics blogs today and came across a post by Princeton economist Uwe Reinhardt that takes the economics profession to task for completely missing the (sinking) boat on the economic meltdown. He places the blame at the feet of a type of macroeconomic pseudo-religious groupthink that believes:

...that private markets invariably are self-correcting and are driven by rational human beings whose careful decisions serve to allocate scarce resources efficiently that is, these decisions maximize a nebulous thing economists call "social welfare."

"Social welfare" in this view is thought to increase when those who gain from a change in the economy e.g., a corporate restructuring or deregulation of the financial sector or increased foreign trade gain more from the change than those who lose from it, even if the gainers had already been wealthy before the change and the losers poor. Thus, few economists were troubled by the explosion of executive compensation on Wall Street or elsewhere in corporate America. It was just the efficient market at work, rewarding these executives for the "value" they were creating. With their model of how the economy works, economists seem to have great difficulty recognizing bubbles in asset values and often are the last to recognize such bubbles, which is why the Fed has never addressed them.

Interesting that Reinhardt ties Wall Street compensation to an asset bubble without making the link explicit, when considering the state of their industry, there is no doubt that high-flying financial industry CEOs have been experiencing a hyperinflated market value that dwarfs anything that happened in the real estate sector.

(I would say the same of economists, except they probably don't get paid that much.)