This financial crisis is an opportune time to return to a favourite theme of mine, that I have previ...
This financial crisis is an opportune time to return to a favourite theme of mine, that I have previously covered here in a different context, namely investment performance. (See International Investment, June 2007). The hunt is on for a scapegoat and I can reveal that I have found the real culprit - but you won't like the answer.
Greedy bankers stand at the front of the queue to be strung up. How could these Masters of the Universe be allowed to bet their banks and put so many people's livelihood at risk?
How could some of the smartest people in the world do something so dumb as to lend or buy at overpriced levels that even laymen could see - and even dumber to leverage up their positions twice, 10, 20 or 30 times depending on how big a reputation they could offer as collateral?
The first-order answer is that it is in the short-term interests of the bankers, even if it was not in the long-term interests of their clients, depositors or shareholders. They were all playing games that involved high chances of small gains but low chances of a big loss. It was irrelevant to them that the big loss might exceed all the small gains. Providing they banked the small gains, until the big loss hit, it was a financial ratchet for personal enrichment.
How can City slickers not know things that it would be inconvenient for them to know?
The second-order answer is that it is also in the short-term interests of many other people in and around the City. Their bosses also paid themselves bonuses on their traders' profits, the staff earned higher wages, the shareholders were paid higher dividends, the depositors were paid more interest and the government collected higher taxes.
How can the FSA spend $400m a year on regulating financial services but still not spot what was going on?
The third-order answer is that it is in the short-term interests of any bureaucracy to maximise staff remuneration while minimising the effort necessary to achieve that. In general, difficult questions can create hostile reactions that disturb a quiet life. Specifically, it is easier for a regulator to act as if anything that cannot be legally defined cannot exist, such as the shadow banking system.
How can the government allow the situation to spiral out of control?
The fourth-order answer is that it is in almost everyone's short-term interests. The rest of the country gladly snapped up their generous loans, driving house prices ever higher and providing themselves with rising living standards, without rising productivity, simply by writing cheques against their paper gains.
The role of politicians is no different to that of bankers. They both respond to the short-term demands of the political and financial marketplaces in which they are professionally employed.
Therefore the final answer is that we are all collectively to blame for the financial crisis, albeit to differing degrees, for letting our short-term emotions overrule our long-term reason. The only exceptions are those who are social outcasts - the involuntary destitute and the voluntary contrarian investors.
- Nick Dewhirst, CEO of www.investors-routemap.co.uk.
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