I always get nervous when being directed to a post by Nicholas Nassim Taleb, author of Fooled By Randomness and The Black Swan. (Ooh, there's a new section to that.) He frequently convinces me of something I am suspicious of at first glance, with intimations I may have to eat my words.
Not so, but nearly so, this time. Taleb argues, in commenting on OWS that bankers shouldn't be paid bonuses. That smacks of exactly the hippie nonsense that would make me embarrassed to show my face over at NOfP, Tigerhawk, or Maggie's.. But, we must pursue thoughts where they lead, especially with NNT. Yet he does not get distracted by the issues that seem to consume the rest of us - whether the financial managers make too much, whether the reporting is fair, whether the protestors make anything more than 15% sense, whether corporations are persons. He gives a quick nod to corruption - which to me was the main issue and the one ignored by political groups fighting other battles - and moves straight to the basic psychological mechanisms which encourage the corruption, mechanisms which are thus the real problem.
When we bail out banks or other large entities, we encourage extra risk by taking some of the danger and sting out of it. When bankers can also secure large bonuses without much personal risk, without much "skin in the game," what do we expect them to do in response? What would we do in a situation where the personal risk is low but the gain is high?
Disguised risk is the problem. Transfer that risk to the hedge funds, where people like to live on that adrenaline, and are actually allowed to fail. Bankers should be boring, like they were in the old days. No big bonuses, just a respectable career.
For me the problem with the notion that "bankers shouldn't be paid bonuses" is that it's stated in the passive voice. Who shouldn't pay bankers bonuses? Answer: anyone whose money is being used to pay them, who doesn't agree that the bankers should be paid bonuses.
ReplyDeleteThe government shouldn't bail out banks. The (private) shareholders of the banks should be the ones deciding whether the bank officers need to be given an incentive to stay and keep working. If not, and the bankers leave in a snit, the shareholders should hire new officers.
When taxpayers bail out banks, things get complicated. The taxpayers are entitled to put strings on bailout money up front, but I don't see how they're entitled to interfere in the banks' corporate governance forever after, unless we frankly nationalize the banks (and don't give these jokers any ideas).