The notion that bankers who make large sums by constantly projecting and promising safety and risk mitigation shouldn't be losing their shirts when everything blows up just lays bare the truth. Everything is setup to protect the powerful and the wealthy, and out of everyone it's probably going to be 401ks, taxpayers, and small businesses to get hurt the most.
There's always the implicit disclaimer. Bankers who manage risk poorly destroy wealth, just as manufacturers who manufacture defective products destroy wealth.
And these are the people that we trust to handle our money. Sometimes it amazes me that the whole financial system hasn't already collapsed in a smoldering heap.
- "Bankers and financeers deserve their pay because they take all the risk", the mind cringes at this one. Risk, what risk?? When was the last time any banker or financieer personally risked anything in their activity?? They get it right, they get paid millions. They get it wrong... they also get paid millions! After 2008 nobody went to jail, no person responsible responsible got homeless, or lost their yacht, never mind their house, or lost their life savings, etc.
Simply put: any person with no savings that takes a low-paid unprotected job is risking infinitely more than any Wall Street-type. If they are in a position that if the company fails they lose their home, their kids go hungry, they can't afford healthcare, etc, then they are risking infinitely more than anyone who "invests" in that company.
- Besides that, capital paid an average of ~5% risk free, staying remarkably constant in the past 2 century. This is empirical data that contradict the fact that rich investors get paid for their acumen.
- Also, even if they did take on "risk", do they deserve to get paid 300x, 400x, 1000x more than the people actually making the things? It's ridiculous and indefensible.
- Banks are fundamentally a scam. They "loan" out money that THEY DO NOT OWN! When issuing a loan, they credit themselves with assets, create a liability at the central bank, then when they get paid back they pocket the interest. Then why can't I, a person looking to buy a home, or to start a business, skip the middle-man then and create a liability myself with the central bank? Ah, no, because it can't be a free for all and there has to be someone regulating that and deciding who gets credit and how much. Okay! Then why is it a handful of rich people? Why is that decision not made democractically! Hell, even an "algorithm" (in the sense of a set of well-defined procedures that return ACCEPT or REJECT in a completely transparent way for any request for credit) would be better than what we have now.
Essentially, we've privatised risk assessment and fucking credit, the most fundamental concept without which no economy can ever work! We are all slaves to the decisions of the people with the capital, there is no accountability, and if things go south it's all our money that goes into fixing things. Reminder that ~200 people control over 40t USD (that's $40,000,000,000,000) in assets. If that's not neofeudalism I don't know what is.
- "But we can look at MBS as a solution to a coordination problem. There are 10,000 families who want to move into a house today and pay for it over a couple of decades. There are 10,000 construction workers who want to build a house today and get paid for it today." So finance institutions get paid billions for those 10,000 mortgages because they are "coordinating" 10,000 contractors. Right, are we supposed to be all stupid?
Also, this is indeed a problem, but exacerbated precisely because capital and credit is privatised and not democratically or algorithmically controlled. So we have to beg Our Lords to dispense some money and let it flow in our economy (for an exorbitant fee, of course).
- "The groupthink that gripped everyone else, from mortgage lenders to bank traders to rating agencies [about mortgage-backed securities], was too pervasive to be overcome by institutional incentives." Again, completely misrepresenting the causes of the problem. Perverse institutional incentives are precisely what caused this! They were making absolute bank peddling this crap assets. Why should they stop? I wouldn't. They had no incentive to do so. They knew that when the bubble burst it would not be their problem. People getting their homes foreclosed would suffer, yes, but not them. They would be far too rich to suffer any meaningful consequence (even if they took some personal financial loss). With some luck, since they had the political and regulatory system completely captured, they could avoid suffering any consequences at all, big or small (which is what ended up happening).
Rating agencies again had all incentives to mark trash as AAA. What's the penalty if they failed again?
EDIT: I welcome constructive dialog if you think I'm misrepresenting things.
…and many normal people have suffered so bankers could have their fun. This is so evil on so many levels, that few people in suits can have such an impact of whole country finances. We all believe in a dream that it’s competition and market prices that drive economy, and then this happens.
It is ridiculous that finance owns such an outsized position in our economy, with the wizards of finance hailed for their key role in the efficient performance of the economy rewarded to the tune of megabillionaires...
and people will say with a straight face that defrauding large numbers of people of their money might not have numerous health / fatal consequences: anxiety, stress, divorce, loss of benefits, working longer past retirement.
It's like saying Mafia bosses or Hitler or Stalin weren't violent and dangerous because they ordered the deaths of millions with a stroke of a pen.
I’m going to disagree, and to some extent I think you prefer the simple narrative with bankers as villains.
I worked on a prop trading desk with some housing bears, who made some significant gains with shorts. While they understood that certain markets were overheated, I don’t think any of them suspected the breadth and depth of the crash that was coming. While their models were better than the other guys, in the end they were really wrong too. Just less wrong then the guys who went long.
Bankers don't create wealth they gather it from other people. There are a lot of people going nuts because their ability to do this is breaking down.
So, investment banks might fail, but as long as people don't pull money out of their checking or savings account I don't think the system is losing money. What I expect is happening is a lot of "fake" wealth is being destroyed but I don't think it's a good idea to buy up fake wealth with cash the government is borrowing. Because, as soon as we borrow money people will take money out of the system to buy our bonds which necessitates our buying assets to compensate.
Actually, it's the other way around: investment bankers conned society into giving them cushy jobs. When you look at the bulk of those accounts, what so you see? Pension funds. How much control do average people have over their pension funds? Almost none, because there are all kinds of rules and regulations "to protect the public" -- except that they don't, so the cycles of haphazard investment and bailouts repeat themselves.
What bugs me as an outsider is that the people who "survive" this and come out on the other side as powerful senior bankers are then also very likely to be powerful outside of the banking profession. It might be that they fund political activity or advise policymakers or maybe just socialize with them.
Can you imagine what damage such a person can do if they succumb to survivor bias? If they use all that is in their power to propagate their life choices as the right life choices for everybody?
No wonder the social contract is being ripped to shreds.
Why wouldn't private bankers be as predatory of high net worth individuals as other financial professions are of normal folk? How does having a couple of mil protect you from being taken advantage of by charlatans? Don't the rich fall for dumb schemes the same was everybody else?
Your last point is especially salient. If wall street needs anything, it's a chilling effect. The threat of personal liability is a pretty good one. Hell, we jail journalists for not revealing sources, but we can't throw a banker in jail for tanking the economy?
While you seem to be trying to say that bank shareholders are astronomical or just wealthy people and aren't worthy of sympathy. You seem to fail to realize that most 401k holders are bank shareholders as a function of their holdings. They are arguable more hurt than the people who get large gains.
I'm not defending anyones point here but pointing out that you haven't quite grasped how the economy works or alternatively you like snarky little value add comments.
Yes, that piece is written for the Wall Street crowd. To them, any time that ordinary people are given even a little bit of badly needed leverage, it's a nightmare scenario.
1. The repeal of the Glass-Steagal act. This allowed banks to undertake the business of commercial banks, investment banks, and insurance agencies. That means that, banks were able to build these complex derivatives, use money from people's savings accounts to partake in risky investments, and then insure them with high standards. All from under one roof.
2. The investment firms went public. This was a fundamental change in the 80's where Goldman, Morgan Stanley, and many others where they became officially owned by the public. That ment that the risk of all their losses was owned by the shareholders as well as profits. Risky investing became the norm, because if you lost a ton of money for Goldman, you may have gotten chewed out or lost your job. But if you made a ton of money for Goldman, you had a very large bonus waiting for you.
Now this mindset has just grown out of hand. It's greed that is driving our financial center, Wall Street.
Pre-pandemic financial skyscrapers were full of people doing not much at all day in day out. Thousands of people would transport their bodies to these skyscrapers every day and proceed to do nothing useful. Seeing this first hand really changed my perception of the finance industry. There is a value in simply having people on the payroll and coming into the building every single day. It's their insurance policy. Banks have to be too big to fail and that means they have to be employing people.
But now all these people are just doing nothing from home and that's not good enough. They need to be doing nothing at work. The illusion that they are doing something useful is essential. It's the Emperor's New Clothes. The financial industry is nothing without trust. Nothing at all.
Disaster strikes when the government steps in to cut ostensibly frivolous expenses, like enormous bonuses for traders for example, which absolutely necessary to conduct business. Traders at America's largest banks are packing up for hedge funds and foreign banks.
This is a big problem with current envy-driven politics surrounding wealth.
This is not envy driven. Not wanting bonuses for bankers who were bailed out by public money has to do with bonus-driven bad decisions being a fundamental cause of the crash that cost everyone else trillions of dollars in wealth, economic growth, unemployment benefits and bailouts. Look up "moral hazard", and note that they are up to the same shenanigans that got us into this mess.
Furthermore, if the banks are, effectively, government guaranteed, then bankers should be paid as government employees. Greater pay is for greater skill and risk, their risk is borne by everyone but themselves and as for skill... So it is only proper (and not "envy") for the taxpayers to get those bonuses.
..old money children who have inherited a fortune but seem to have contributed little of value themselves
This is also a huge economic and social problem, no need to invoke "envy". The moneyed elites have started to decouple themselves from the rest of the world. I went to a prep school in Michigan where this was quite apparent, and scary. There was also a recent study that warned that this decoupling of the elites from everyone else could lead to (or contribute heavily to) the collapse of civilization [1]. For an artistic rendition, see "Elysium". What's so scary about that film is not the dystopian outlook, but rather how real a lot of it already feels.
They're envious of highly paid sporting or artistic celebrities who get more salary in a week than most of us make in a year.
Again, there are good economic arguments for this being a problem. Pay way in excess of the ability to consume creates a huge overhang in liquidity with which people start to gamble in the international financial casino, creating instability[1] See also "Giant Pool of Money"[2]
And so they support punitive rates of tax for those who earn noticeably more than they do
The rates are not punitive. They are stabilizing. Where this rate starts is a good question to which I don't have a good answer.
Unfortunately, what that usually does in practice is hit highly qualified professionals or modestly successful entrepreneurs
Not according to any statistics I have seen. References?
However, the people these punitive taxes don't hit are the ones that the popular moneylust craves, because the super-rich are the people who have the flexibility to move their assets and/or themselves around to avoid high-tax environments. Absent serious international co-operation to overcome the naturally competitive tax environment that today's globalised society creates, these people will continue to be super-rich no matter what
So should we not do this because it is wrong or because it won't work? It seems it can't work if we don't start somewhere. Certainly finance has globalized, so it seems it is time for enforcement to catch up. This seems to start happening, see the crackdown on Switzerland as a tax-haven/money-laundering center.
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