Wille Faler’s Buzzword Bingo

A lot can be said about the current credit crunch - first and foremost central banks across the world in general, and the american Federal Reserve in particular have poured gasoline on the credit bonfire by means of artificially low interest rates, resulting in unhealthily cheap credit being plentiful. This is not a lesson the Fed seems to have learned anything from, now that they are again lowering interest rates and pursuing wildly inflationalary monetary policies that will only go towards rewarding irresponsible economical behaviour (spending more than you have on things worth less than you spend), and penalizing responsible economic behaviour (saving and producing).

But, blaming only the monetary policies and monetary system is short of the target, even if they have not helped the situation - it’s kind of like blaming obesity on McDonalds for selling Big Macs so cheaply.

The core problem has been a perverted incentive system in both retail- and investment banks coupled with weak checks and balances on risk taking:
Effectively, people in the banking industry have seen massive potential rewards in pursuing high risk, short term goals, but very small downsides if those risks would go haywire.

Let’s just examine the following example:
If you were to put $1 billion of someone elses money on the line on a very high risk gamble, were you knew that if it worked out, you’d be getting a $10 million bonus, but if it went all wrong, all that would happen would be that you got fired and could move on to the next employment were you would be faced with similar situations. Would you be inclined to take the great risk for the big reward, with the knowledge that the downside was very limited?

I think the answer to my question for most sane, rational people would be a resounding “Yes!”.

What is currently playing out is nothing more than the consequences of massively perverted and misaligned incentives between the employers and employees (the bankers themselves) on a massive scale.

If a companys goals are in complete misalignment with its employees incentives, disaster will always follow, it is as simple as that. The Federal Reserve and other central banks will probably keep their incompetent bumbling up for the foreseeable future, but the affected banks can certainly do something about reforming their screwed up and broken incentive systems .

Getting a large bonus should not be a God given right regardless of long term results, it should be a privilege and reward received for doing the right thing in the long term perspective, regardless of whether it means taking a few short term hits at times.