By Arnold Kling
When I heard about the disastrously irresponsible investments made by the Amaranth hedge fund, my first reaction was, who would be so stupid to have put up the margin requirements for such a scheme? The answer turned out to be found in my own backyard– the San Diego County Employees Retirement Association apparently donated over a hundred million dollars to this worthy cause.
In the private sector, a company that fritters away its pension fund gets into trouble (although perhaps not enough trouble, given the moral hazard in the way we run the Pension Benefit Guaranty Corporation). In the public sector, the taxpayers bear essentially all the risk.
The agency problem is difficult enough in the private sector. In the public sector, it is worse. Ideally, you would regulate public-sector financial agents much more closely than private-sector agents, in order to compensate for the weaker incentives for self-regulation.