I blogged a few months ago about my concern regarding the precedents being set by the Northern Rock and Bear Stearns debacles - that investment bankers and city executives can take outrageous risks, bag huge bonuses and get into a situation that for the sake of the economy, the government has to step in and sort it out.
If only that had been the end of it; I don’t think anyone really thought it was, but since then things have really gone south. In the USA we’ve had the state effectively re-nationalising Fanny Mae and Freddy Mac, and they’re now debating a $700bn rescue package to buy bad assets from a host of financial institutions in order to ‘extract the poison’ from the markets.
Now, as before I completely understand that, in the immediate aftermath of a train-wreck such as this, you have to concentrate on damage limitation and short-term recovery. That doesn’t mean, however, that we should stop asking searching questions - the world has been placed in a woeful position thanks to a comparatively small group of people who benefitted from continuously feeding the insatiable credit monster, no matter what the realistic repayment prospects were for those debts. It’s typical commission-based salesman behaviour - close the sale, let the accounts department worry about the rest.
I’m glad to see that the US congress haven’t just rubber-stamped the rescue bill, and are asking serious questions about future guidance & regulation on the market and its operators. The Wall Street guys will tell you that interference and regulation just inhibit the market and make everything worse, but I believe that recent events rubbish that claim; if the market was truly self-sufficient and self-regulating, it wouldn’t have gotten itself into the position where it needed a handout from regular people’s tax dollars to avert a total meltdown. Clearly short-term greed overwhelmed good sense, and those in this market acted like children who didn’t know when to stop eating junk food - except in this case, everyone ends up with a stomachache. Like children, if they can’t figure out for themselves how to behave, then they need a responsible adult to make those decisions for them. Trust is earned, and the financial sector essentially frittered all that trust away having a giant party, and there must be consequences.
Some people will blame the culture of credit and say that the market was just responding to that, and so it shouldn’t be held entirely accountable, and I say hogwash. Sure you can blame the people who took out loans they couldn’t afford to a degree, but come on - these were unlikely to be financially savvy people, and at the end of the day it’s up to the lender to evaluate repayment prospects rationally. After all, if they don’t get their money back, they’ll go out of business. In this case though, the financial wizards concocted another one of their ‘vehicles’ which magically allowed dubious debt to be repackaged and resold, effectively becoming somebody elses problem. What a marvellous invention! We can take all the risks we want, collect our fat bonuses and just keep hiding all our crap under a giant rug in the spare room. No-one will ever find it, right?
This is not responsible behaviour, it’s reprehensible. The vast majority of regular people work hard, are prudent with their money, think hard about lending or borrowing money, and don’t make the kinds of basic affordability errors these so-called financial experts were making. After all, regular people have to live with the results of their actions, so prudence is a wise stance. Mistakes in the financial sector, however, result in damage mostly to the lower echelons of their workforce, crippling problems for the rest of the public, desperate measures from government; yet the execs still get to keep their huge bonuses earned during the previous years.
After all the mess is cleaned up, I hope those that benefitted from the years leading up to this situation are held to account. Enron, Nick Leeson - they were nothing compared to this. The culture in the upper echelons of corporate banking is clearly fundamentally broken, and both governments and the industry owe it to regular people to resolve it, not just with short-term bail-outs, but with fundamental change. Something is badly wrong in the financial sector, and they’ve proven themselves incapable or unwilling to sort it out before it resulted in pain for everyone else. Because of that, they’ve forfeited their right to decide what happens next - behave like a greedy child, and you deserve to be treated like one.