Dispatches • 20 February 2008 • The SnowBlog
Dispatches
I taped Channel 4's Dispatches the other night on the banking-driven credit crunch. V. depressing stuff. As you'll remember, it was obvious even to ignorant outsiders like me that there was a credit crunch coming and that it would trigger a US recession. But what I didn't realise is that the UK banking sector would see all that high-risk financial dynamite-juggling going on in the States... and rush to join in. But, as one of the MPs interviewed pointed out: we let banks privatise their profits but pass their really big failures on to the general public. So why wouldn't they want to gamble? [warning: contains highly lefty thinking] Actually, a lot of industries do that these days - any industry with private-public partnerships in fact - but the financial sector seem to have perfected what I call the profit ratchet. This is where jacking up your business in the short-term gets you a bonus, and even if it leads to the downfall of your firm a few years later, you never have to give that multi-million dollar bonus back. So managers are massively incentivised to do things that in the longer term are bad for the organisations they work for. Profit ratchets caused the Junk Bond problems of the Eighties, they were behind collapses like Enron, MCI, Worldcom etc; and they're going to give us hell in the financial markets in 2008.
Think of it this way: if you had the choice of steady growth in your industry or a boom and bust cycle, most of us would prefer steady growth. But many in high places would choose boom and bust, because only if they can start a boom will they get mega-bonuses. And there's no inverse-bonus that costs them money in a bust.
So ironically, all those credit agencies who a couple of years back petitioned Pres. Bush to 'reform' the US bankruptcy laws to stop private citizens escaping from crushing debt will any day now be wanting to hand government and the general public as much of their own debt as they can. And the senior managers behind those policies will have grown fabulously rich creating that situation. Lobbyists work hard to get US corporate and capital gains taxes lowered, because they're what get in the way of mega-bonus seekers and speculative investors. Which just leaves income tax in place to raise money so there'll be funds available when the corporations have losses to unload - or when they want no-bid contracts from old friends who've gone into politics. I've got to say, that while Karl Marx might not have been right about the solution, I can't help thinking he was right about the problem.
Rob
I taped Channel 4's Dispatches the other night on the banking-driven credit crunch. V. depressing stuff. As you'll remember, it was obvious even to ignorant outsiders like me that there was a credit crunch coming and that it would trigger a US recession. But what I didn't realise is that the UK banking sector would see all that high-risk financial dynamite-juggling going on in the States... and rush to join in. But, as one of the MPs interviewed pointed out: we let banks privatise their profits but pass their really big failures on to the general public. So why wouldn't they want to gamble? [warning: contains highly lefty thinking] Actually, a lot of industries do that these days - any industry with private-public partnerships in fact - but the financial sector seem to have perfected what I call the profit ratchet. This is where jacking up your business in the short-term gets you a bonus, and even if it leads to the downfall of your firm a few years later, you never have to give that multi-million dollar bonus back. So managers are massively incentivised to do things that in the longer term are bad for the organisations they work for. Profit ratchets caused the Junk Bond problems of the Eighties, they were behind collapses like Enron, MCI, Worldcom etc; and they're going to give us hell in the financial markets in 2008.
Think of it this way: if you had the choice of steady growth in your industry or a boom and bust cycle, most of us would prefer steady growth. But many in high places would choose boom and bust, because only if they can start a boom will they get mega-bonuses. And there's no inverse-bonus that costs them money in a bust.
So ironically, all those credit agencies who a couple of years back petitioned Pres. Bush to 'reform' the US bankruptcy laws to stop private citizens escaping from crushing debt will any day now be wanting to hand government and the general public as much of their own debt as they can. And the senior managers behind those policies will have grown fabulously rich creating that situation. Lobbyists work hard to get US corporate and capital gains taxes lowered, because they're what get in the way of mega-bonus seekers and speculative investors. Which just leaves income tax in place to raise money so there'll be funds available when the corporations have losses to unload - or when they want no-bid contracts from old friends who've gone into politics. I've got to say, that while Karl Marx might not have been right about the solution, I can't help thinking he was right about the problem.