Monday, 3 November 2008

Comment Piece on the Financial Crisis

Just to finish's today's bumper round-up, here's a rather elderly (but hopefully venerable) comment leader on the financial meltdown. There's a wonderful illustration to go with this, and I'll see if I can at least get a link to it.

The long path to sobriety [ran as 'Blame the players, not the game', Student 14.10.08]

That great intellectual of our times, President George W. Bush, described the current financial crisis in the following enlightening terms: “Wall Street got drunk, and now it’s got a hangover.”
The usual Bushism, you might think. However, while Bush may be a man guilty of regularly using misguided ideology to fill the gap where competence should be, perhaps this contribution bears further inspection.
Admittedly, it does conjure up some rather interesting images: the pasty-faced chief executive of HBOS, waking and opening his bleary and bloodshot eyes to discover he somehow got into bed with badger-haired chancellor Alistair Darling. Meanwhile, a scowling Gordon Brown mutters to himself as he cleans up the mess littering the hallway from someone else’s party.
But take Bush’s point seriously, and there really is no other way to describe an industry in which many of the major players go bust as a result of a heady cocktail of vast pay packets focused solely on incentivising ever greater risk-taking, and where bankers trade packages of debt so complex that none of them understand what they’re buying and selling, nor even how much of it they own.
The result was a toxic game of pass-the-parcel. As the ‘Masters of the universe’ unravelled their respective investments, confidence dropped ever further until the current panic set in, leaving nothing and no-one safe.
In the modern world every aspect of finance is interconnected, and the credit crunch’s victims have come in unexpected places. Only last week, it was revealed that councils across the UK had been investing their money in Icelandic banks – fine, until these went bust, leaving Kent County Council, to take just one example, with an embarrassing £50m shortfall.So you might imagine this to be a strange time for me to argue the case for the defence: that the bankers, the fat cats, can and do benefit society. But I’ll try.
Firstly, what we’re seeing isn’t the great collapse of capitalism, as various prophets of doom have suggested. The simple reason is that almost nobody wants that. People all over the world prefer the system they know and grew up with, governments too (even nominally communist China), as opposed to taking a wild gamble on an unknown, and quite possibly impossible, alternative.
The simple truth is that the whole banking system is based on mutual benefit – that’s what trade is. At least that’s the case when the deals involved are transparent. That is what a good financial system is supposed to allow to flourish.
The problem here isn’t the idea, it’s the implementation. A transparent financial system allows companies to compete on an equal footing, which encourages businesses to be efficient, transparent in their turn, and to satisfy customers. This is quite clearly a good thing.In this case, however, the banks thought they could find a short cut to fulfilling their own interests in the way they incentivised their employees, the much-maligned traders. They paid out big bonuses, obscenely large bonuses, for traders who made big bucks in the short term, and for a while the gamble paid off.
In the hunt for quick profit, which for them meant a better kitchen, in a grander house, with a faster car parked outside, traders explored and invented new ways of trading debts, in packages so complex that they didn’t have a clue what they were trading, just that it made a profit. The system became murkier, more confusing, and thus riskier. This suited the individual traders, but not their employers, and by extension, not wider society.
All it took was the gradual realisation that most of these deals were based around mortgages given to people who should never have been offered deals in the first place, for the simple reason that they couldn’t pay. Suddenly, these financial emperors had no clothes, and the system was in crisis.
However, the fault here lies not with the financial system, but with the bosses, individuals who got their sums wrong, the chosen few, hand-picked for their expertise. They implemented structures that benefited their employees in the short-term, not their companies.
The system will take time to recover. Injured banks mean that companies are unable to work as efficiently, that they have to set their sights lower. But the financiers will rebuild, and they’ll learn their lessons about how employees can be better handled, and banks better run. Government too has its part to play. Too loose a rein for the banks hurts everyone. Greater controls on recklessly high pay and bonuses for traders should be introduced, as should measures to prevent the same sorts of panicked stampedes occurring again.
The path to sobriety is long, and painful. Just ask America’s most famous recovered alcoholic, President George Walker Bush.

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