I dare say many of the bankers who walked away with millions in bonuses did so in the sincere belief that they were merely winners in a larger win-win game. The rating agencies were clearly wrong in some of their risk assessments and are accused now, at the very least, of having cut corners when rating the avalanche of collateralised debt obligations, but it’s not clear that they were knowingly dishonest.
The Chairman of Northern Rock’s Risk Committee was accused recently by a Commons Committee of ineptitude, but he is an honourable man and no crook. Similarly a Deputy Governor of the Bank of England was accused by another Commons Committee of being “asleep at the wheel”, but not of pocket-lining conspiracy.
Some of main actors in this sad drama probably are pretty shady characters. Some are clearly amoral if not immoral. Some would not have wished to question the validity of the golden goose when it was rewarding them so generously. But I suspect most of the players (and most of us investors) were simply stupidly credulous. We all bought into a crazy paradigm. And that paradigm balloon has burst.
It’s not the first; from the belief in alchemy, the South Sea Bubble, through actuarially justified pension holidays, and the dotcom crash we have an ignoble history. There are crooks involved but many more fools.
Which raises the obvious question, what ridiculous paradigms are we still accepting? I think there are a few contenders:
- that it's OK for governments to engage in massive off-balance sheet borrowing - which could well bite us in the bum in a few years time
- that the carbon trading market works well in providing effective incentives for reducing pollution - which has an economically dubious basis and looks ripe for abuse and the delivery of perverse outcomes
- that effective regulation of financial institutions is possible - when it seems to provide no better foresight of future hazards than looking in the rear view mirror while driving through fog at 70mph
- that free market capitalism has somehow proven its ultimate superiority to all alternative arrangements for running our economic affairs.
According to a newish school of academic thought (and George Soros in his latest book), the assumption of rationality in economic behaviour is probably the greatest false god. This certainly looks like a plausible hypothesis when I ruefully assess my future income in retirement.
3 comments:
Ah yes, but I don't think we should be too hasty to discard all of the tools of classical economics.
The concepts of supply and demand still provide pretty useful insights into what is happening in the markets for oil, food and housing finance.
A good deal of the credit-fuelled expansion appears to have been driven by individuals acting entirely rationally in response to prevailing economic incentives
- until early 2007. The perversity has arisen because these incentives were structured to be a one-way bet for bonus recipients.
If there has been a failing, it has arisen from the herd mentality of remuneration committees and their professional advisers. And, as GOM has observed, from the faith of credulous investors placing their trust in these ultimately flawed models.
If you wanted to feel really grumpy, you might find http://www.timesonline.co.uk/tol/news/politics/article4407258.ece to be suitably depressing material... At a time when Gordon might want to find some good news to put out, his ill-considered legacy continues to catch up with him. And if that wasn't bad enough, of course, the Pensions Regulator has just had to bodge
(http://www.thepensionsregulator.gov.uk/whatsNew/pn08-15.aspx) the question of implementing funding calculations around improved mortality assumptions - that couldn't be anything at all to do with Gordon's smash and grab raid on pension funds in 1997, could it???
In spite of your failure to publish my last comment, here's another.
Job titles that amaze.
We are becoming accustomed to job titles that mean the reverse of their apparent meaning. The Cabinet Office used to have a "Head of Social Exclusion". A throw back to a period of divided communities? No, it should have said Social Inclusion. "Head of Financial Forecasting" means "your guess is as good as mine". "Head of the Risk Committee" means a credulous (or corrupt) idiot who swallows traders' lies. But yesterday's advert in the Sunday Times takes the biscuit. "The Bank of England's Deputy Governor for Financial Security". What does this mean? Head of indecision and holder of an irrelevant moral high ground? Finder of excuses for a Chancellor confronting exconomic disaster? At a salary of £240,000!
Blimey.
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