Wednesday, 1 April 2009


I haven't written anything about the Credit Crunch because economics is one of those subjects I just can't get my head round. SpaceAccountant was nice enough to sit me down once and patiently explain why we need interest rates, and that's literally as far as I've gotten.

So I'm not shooting my mouth off about it.

The one thing I have been tempted to write about is the fuss over traders demanding they get their bonuses/retention payments, even after the world has woken up to find it's blown all it's money and will now have to crash on Saturn's couch. Even for someone who doesn't know his ISAs from his FSA, there's something distinctly fishy about a bonus for which there is literally no criteria under which you don't deserve it, short of being fired.

Fortunately I don't have to dirty my hands, though, because Mark Taibbi has done the job for me.
Out in the real world, when your company burns a house down, you're not getting paid by that client. It's only on Wall Street, where the every-man-for-himself ethos is built into an insanely selfish and greed-addled compensation system, that people like you expect to get paid in a bubble -- only there do people expect their performance bonuses no matter how much money the shareholders lose overall, no matter how many people get laid off after the hostile takeover, no matter how ill-considered the mortgages lent out by your division were.

You expect that money because you think it's owed to you. But what money? The money is gone. Your boss, if not you, set it all afire. You want the money, but where exactly do you think it's coming from?

Do you just not understand that that money now would have to come out of someone else's pocket? That it would have to come from middle-class taxpayers, real plumbers, people who didn't make millions over the years in equity and commodity trading?
That's my favourite part, but the rest of it is great as well.

h/t to MGK.


Tom said...

Unfortunately our friends in Wall Street and the square mile understand that all too well. It's called lemon socialism, or privatising the profits while socialising the losses.

I think Mr Taibbi has oversimplified the point though. His argument could equally apply to their salaries, and I doubt anyone would expect them to keep working for nothing (although there would be some justice in that). My suspicion is that these "bonuses" are simply regarded as part of salary by the workers concerned and their employers, but for some dubious tax reason they have to be called bonuses. This works well until they end up owned by the public, who use a more natural definition of the word bonus. But by then it's too late, unless you dream up wacky after-the-fact taxes like the US congress, which are almost as immoral as the pay packets they're trying to claw back.

The real problem is that these institutions are too big to fail, as was proved beyond doubt when Lehman was allowed to do just that. If they could be allowed to fail, there'd be no bonuses (or salary for that matter). So why are they allowed to be run as purely capitalist enterprises, which only function on the understanding that reckless risk-taking can end in failure? If only there was an alternative model based on mutual sharing of profit and risk ... oh wait, it's called a mutual. It's hardly suprising that the building societies are suffering so much less than the banks from the crisis. And who tried to demutualise the mutuals? Reagan and Thatcher. Doesn't it feel great to be one of Thatcher's children?

Actually what really bugs me is this cycle of regulation and deregulation happens over and over again, and we never learn ...

"I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank." - Andrew Jackson, 1834


PS: If you want to know what's going on, read Paul Krugman.

Gooder said...

I actually think the only way to really break the cycle (this is all a bit BSG isn't it!) is to actually let one of the large Banks fail, take the inevitable economic pain and then what is left standing at the end will be much stronger.

However there is understandably a desire to prevent this to avoid the prolonged period of depression which would inevitably occur, so things get propped up by public money instead

Tom said...

But that's exactly what they tried in the 1930's, except with thousands of banks. The cycle still repeated. At least Lehman demonstrated that it would be just as crazy to try this approach now as it was then.

I think the fundamental reason for why these crises repeat is because people who only have memory of good times only see the downside of regulation (stifling growth) and not the upside (preventing muppets from destroying the world). That's why the cycle has approximately the same frequency as a human lifetime.