NY Times-End Bonuses for Bankers, thoughts?

Steven7045's picture
Rank: Chimp | banana points 2

From Op Ed - End Bonuses for Bankers

"Instead, it's time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever. In fact, all pay at systemically important financial institutions -- big banks, but also some insurance companies and even huge hedge funds -- should be strictly regulated."

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Comments (59)

Nov 8, 2011

That company restricted from paying bonuses would cease to exist. The sharks would be circling. All of their talent would go elsewhere. Might as well just turn off the lights. I didn't read the article because cash cab is on.

"I'm short your house"

Nov 8, 2011
W.Beach:

I didn't read the article because cash cab is on.

Haha

Nov 9, 2011
W.Beach:

That company restricted from paying bonuses would cease to exist. The sharks would be circling. All of their talent would go elsewhere. Might as well just turn off the lights. I didn't read the article because cash cab is on.

That would be awesome. Investment banking is a leachers occupation. It adds no systemic value. Lending is the only systemic function required of banking. It's basically a small club where you're a guaranteed winner once you're in. Since you're gambling with taxpayer assets, they have no choice but to bail you out when you lose.

An added side effect is all of that ivy talent would no longer have an incentive to spend their lives figuring out new ways to game the system, and instead might focus on creating new and innovative ways of solving real problems.

Nov 8, 2011
djfiii:

An added side effect is all of that ivy talent would no longer have an incentive to spend their lives figuring out new ways to game the system, and instead might focus on creating new and innovative ways of solving real problems.

Yea, instead we would all become scientist's and build a super awesome spaceship that could take us anywhere but here. I can't wait until this era of sandy vagina, self-pity, underachievement, and self entitlement is over. Making a blanket statement that banks don't add any value is pretty bold, and wrong in my opinion. This attitude that (investment)banks are evil/greedy is a malignant ideology that is causing spillover effects and threatening to not only hinder our financial system but also our free market and individual rights. That is a terrifying thought to me, only just about to turn 24.

America, and the greater population, should be required to complete a competency test before being granted the right to freedom of speech. It is concerning that one day I might not be able to partake in a free market environment because stupidity and ignorance prevail.

"I'm short your house"

Nov 8, 2011

Author is the guy who wrote "The Black Swan: Impact of the Highly Improbable". This isn't just your average NYTimes journalism major so don't just write him off without at least considering what he has to say. That said outlawing bonuses would completely upend the compensation system of banks and would also be a huge overreach of the power that the government should have over the free market.

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Nov 8, 2011
Matthias:

Author is the guy who wrote "The Black Swan: Impact of the Highly Improbable". This isn't just your average NYTimes journalism major so don't just write him off without at least considering what he has to say. That said outlawing bonuses would completely upend the compensation system of banks and would also be a huge overreach of the power that the government should have over the free market.

NNT's point is that you can't have it both ways. He thinks that either you're an investment bank and then you can give whatever bonuses you want, or you're a commercial bank that is backed by the gov't in which case you shouldn't. That isn't an overreach of power, that's just the gov't saying we aren't going to insure firms that incentivize risk taking with other people's money.

Nov 9, 2011
Matthias:

Author is the guy who wrote "The Black Swan: Impact of the Highly Improbable". This isn't just your average NYTimes journalism major so don't just write him off without at least considering what he has to say. That said outlawing bonuses would completely upend the compensation system of banks and would also be a huge overreach of the power that the government should have over the free market.

... not everyone respects Taleb's book FYI, especially those in AM.

Nov 9, 2011
andyinsandiego:
Matthias:

Author is the guy who wrote "The Black Swan: Impact of the Highly Improbable". This isn't just your average NYTimes journalism major so don't just write him off without at least considering what he has to say. That said outlawing bonuses would completely upend the compensation system of banks and would also be a huge overreach of the power that the government should have over the free market.

... not everyone respects Taleb's book FYI, especially those in AM.

^ That would be me.

Nov 8, 2011

Stopped reading the article after "End Bonuses for Bankers".

Without bonuses, first-year's base salary would be 130k.

Nov 9, 2011
Plastic Cup Boys:

Stopped reading the article after "End Bonuses for Bankers".

Without bonuses, first-year's base salary would be 130k.

Yeah, that was going to be my comment...although I'm not sure if $130k would be the right number. Anyways, the point is, you would be advocating for the elimination of variable pay in exchange for a more permanent pay...which really would only cause more problems if the institution ever encountered any financial problems.

Also, I hope this article was written in response to the bonuses that the executives at Fannie and Freddie got last year.

Regards

Nov 12, 2011
Plastic Cup Boys:

Without bonuses, first-year's base salary would be 130k.

Yeah, I don't understand how people can bemoan CS and UBS's rigid comp structures and say end bonuses at the same time.

I can't think of very many negative externalities to IBD bonuses, beyond what you would expect in any performance monitored sales business (oversell product value to the client)

Arguably having traders pay the sales bonuses on some desks (FI mostly, don't know much about derivatives) leads to conflicts of interests, which sophisticated clients understand and thus discount what their sales guy and his research analyst have to say. Arguably trading bonuses or % of book in a world where our risk models suck and the risk managers are not respected (i.e. MF Global not GS) creates a moral hazard problem. Research bonuses determined by bankers used to cause lots of issues pre-reform, and still can cause some, but II and other rankings reduce this effect

Nov 8, 2011

What would banking look like if bonuses were eliminated? It would not be too different from what it was like when I was a bank intern in the 1980s, before the wave of deregulation that culminated in the 1999 repeal of the Glass-Steagall Act, the Depression-era law that had separated investment and commercial banking. Before then, bankers and lenders were boring "lifers." Banking was bland and predictable; the chairman's income was less than that of today's junior trader. Investment banks, which paid bonuses and weren't allowed to lend, were partnerships with skin in the game, not gamblers playing with other people's money.

He basically thinks that Glass-Steagall should be put back in place and investment and commercial banking should be separate again. Investment bankers would be able to keep their bonuses so don't get your panties in a twist after just reading the headline.

Nov 8, 2011

I met with Nassim a bunch of times, he's a really smart guy but way too arrogant for his own good. He's good at recognizing complex problems but comes up short with actual solutions.

Nov 8, 2011
RagnarDanneskjold:

I met with Nassim a bunch of times, he's a really smart guy but way too arrogant for his own good. He's good at recognizing complex problems but comes up short with actual solutions.

I have heard things along the lines of him being arrogant like a professor and a douchebag like a Wall Street native. Regardless of his beliefs, he has had a bigger take home from writing books than from trading, which is something a lot of people do not know. I can't tell if he would call himself a believer in Austrian economics, but his disdain for econometric modeling of human behavior makes me think he is. Either way, I wouldn't invest in him with my life savings, or anyone else's for that matter. I can buy physical gold, farmland, and SPY puts just as easily as the next guy.

Nov 8, 2011

Didn't read the article, but if you could force this down the throat of every substitute employer that traders might jump to, where is the talent going to go? The superstars will get snapped up by hedge funds but the remainder will have no choice but to stay.

Also, assuming you could somehow freeze base pay at current levels (i.e. preventing banks from making up the difference by increasing base), the irony is that no one would take outsized risks because they wouldn't be compensated for it. Salespeople and traders would just care less about work, and financial innovation would probably be frozen in its current state, or at best, progress very slowly.

Nov 8, 2011
houseofcards:

Didn't read the article, but if you could force this down the throat of every substitute employer that traders might jump to, where is the talent going to go? The superstars will get snapped up by hedge funds but the remainder will have no choice but to stay.

Also, assuming you could somehow freeze base pay at current levels (i.e. preventing banks from making up the difference by increasing base), the irony is that no one would take outsized risks because they wouldn't be compensated for it. Salespeople and traders would just care less about work, and financial innovation would probably be frozen in its current state, or at best, progress very slowly.

Isn't this the case with almost every industry? If we could somehow only compensate on performance we would be leaps and bounds ahead of where we are now.

Nov 8, 2011
houseofcards:

Didn't read the article, but if you could force this down the throat of every substitute employer that traders might jump to, where is the talent going to go? The superstars will get snapped up by hedge funds but the remainder will have no choice but to stay.

Also, assuming you could somehow freeze base pay at current levels (i.e. preventing banks from making up the difference by increasing base), the irony is that no one would take outsized risks because they wouldn't be compensated for it. Salespeople and traders would just care less about work, and financial innovation would probably be frozen in its current state, or at best, progress very slowly.

You should probably read the article before you opine on it...

Nov 9, 2011
houseofcards:

...Also, assuming you could somehow freeze base pay at current levels (i.e. preventing banks from making up the difference by increasing base), the irony is that no one would take outsized risks because they wouldn't be compensated for it. Salespeople and traders would just care less about work, and financial innovation would probably be frozen in its current state, or at best, progress very slowly.

I just don't think that is true. Traders and the like are typically all type A to the tenth power. They are in trading because it's stimulating and they are challenged. Yeah, I'm sure they love making money, but if they couldn't go anywhere else because the market was being controlled by regulation, they would still do their best to 'win' by having the largest gains, etc. You remember being a kid and wanting to be stronger and faster, etc. than everyone else? It's the same concept. I didn't do more pull-ups or score more touchdowns because I got a bonus from the neighborhood kids' weekly allowances...I did it because I wanted to be better than the rest.

Regards

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Nov 8, 2011

If this fuck wants to move to a communist country where government controls companies then he's more than welcome to do so. We don't want/need that shit here in the land of the free.

Nov 9, 2011
txjustin:

If this fuck wants to move to a communist country where government controls companies then he's more than welcome to do so. We don't want/need that shit here in the land of the free.

Yeah! This is the land of consequences! When the fat cat bankers blew themselves up we let them go under because we're free market capitalists, damn it! Oh, wait...

Nov 11, 2011
Edmundo Braverman:
txjustin:

If this fuck wants to move to a communist country where government controls companies then he's more than welcome to do so. We don't want/need that shit here in the land of the free.

Yeah! This is the land of consequences! When the fat cat bankers blew themselves up we let them go under because we're free market capitalists, damn it! Oh, wait...

I was going to post the same thing but figured i should scroll down and make sure u hadnt first!

In this business capitalism is only acceptable when things go well!

Nov 9, 2011
txjustin:

If this fuck wants to move to a communist country where government controls companies then he's more than welcome to do so. We don't want/need that shit here in the land of the free.

^Didn't read the article. Glass-Steagall.

America! Fuck Yeah!

Nov 8, 2011

"Nassim Nicholas Taleb, a professor of risk engineering at New York University Polytechnic Institute, is the author of "The Black Swan: The Impact of the Highly Improbable." He is a hedge fund investor and a former Wall Street trader."

I bet he felt the same way when he was an MD at UBS and 'chief arbitrage derivative trader for commodities, currencies, and non-dollar fixed income' at CSFB.

Nov 8, 2011

Rich stuff coming from a guy who lost money in 2001 running a "black swan fund".

Nov 9, 2011
Cartwright:

Rich stuff coming from a guy who lost money in 2001 running a "black swan fund".

"Markets can stay irrational longer than you can stay solvent!"

Nov 8, 2011
Asatar:
Cartwright:

Rich stuff coming from a guy who lost money in 2001 running a "black swan fund".

"Markets can stay irrational longer than you can stay solvent!"

I don't give a fuck if my money manager is sane as long as he makes me money.

Nov 9, 2011

he has had a bigger take home from writing books than from trading, which is something a lot of people do not know.

how do you know? seems unlikely given that he was an MD in S&T, has worked for a hedge fund, etc.

Nov 9, 2011

If a company fails, I do not believe that the people who are responsible should be paid out. How about companies start doing the smart thing and put a clause in employment contracts to the effect of "causing a net loss to the company shall jeopardize any bonus and severance agreements". This way, I'm not penalized if the moron in the office next to me is careless and fucks up. This and deferred compensation would put an end to golden parachutes for retards fucking things up and then bailing on the company....and would benefit the people like YOU and ME who do what they're supposed to: make $$$$ bro.

How about the Times sticking to publishing news and not trying to play corporate consultant.

Nov 9, 2011
UFOinsider:

How about the Times sticking to publishing news and not trying to play corporate consultant.

It's an op ed. Also, more of a political statement than anything else.

Nov 9, 2011
duffmt6:
UFOinsider:

How about the Times sticking to publishing news and not trying to play corporate consultant.

It's an op ed. Also, more of a political statement than anything else.

I'll simplify what I was really getting at: How about the Times shuts the hell up.

Nov 9, 2011

A lot of managing directors I know say banking is "sort of a scam" and that they are overpaid relative to their value and "talent." It's the entry-level folks who actually take themselves seriously and think they are important.

If you've got "talent" you'll be able to succeed elsewhere or in a more difficult environment. If you suck, you won't.

Being responsible for a lot of money or having a lot of education are hardly good reasons to deserve anything. There are lots of people with better educations who teach at universities. There are plenty of civil servants who are responsible for money.

If the market shrinks and the talent rises to the top (to PE shops or to fewer, less regulated institutions), we'll all be better for it so that all the overpaid idiots in finance get washed out. It's like most things, and probably only 20% of people at banks actually add any real value.

I suspect most of the whining comes from the bottom 80%.

-Former bottom 80%er...

I rich, smarts, and totally in debt.

    • 1
Nov 9, 2011

I can't wait for the NYT to go bankrupt, what a rag. This Glass-Steagall bullshit is really getting old too, considering how important deposits were for liquidity at banks like JPM during the crisis. Oh, so you want to take away the largest and most stable source of capital so there's less catastrophic risk? Good idea, fucknut socialists.

I wouldn't say the idea of investment banking is leeching. Lending is perhaps the most tangible aspect of it, but I'd argue that investment bankers who actually care about making the right deals are of some of the highest value to the economy on a per capita basis. If capital isn't going to the right places, the economy suffers. Instead of having the government control the flow of capital, we recognize the profit motive and a free market price system to give these signals. I guess if every corporation knew how to manage its finances, acquisitions, etc. without any outside help then banking would be a scam. I don't think that's the case, though.

I would like to note several fallacies the author makes as well:

1) He criticizes bankers for not propagating hysteria about Black Swan events that he admits are difficult to predict and rare, supposedly because of a desire for bonuses.
2) We should assume bailouts are here to stay forever.
3) Incentive-based pay leads workers to be less-productive than salaries.

All-in-all, fuck this guy.

Nov 9, 2011
lolbaringslol:

I can't wait for the NYT to go bankrupt, what a rag. This Glass-Steagall bullshit is really getting old too, considering how important deposits were for liquidity at banks like JPM during the crisis. Oh, so you want to take away the largest and most stable source of capital so there's less catastrophic risk? Good idea, fucknut socialists.

I wouldn't say the idea of investment banking is leeching. Lending is perhaps the most tangible aspect of it, but I'd argue that investment bankers who actually care about making the right deals are of some of the highest value to the economy on a per capita basis. If capital isn't going to the right places, the economy suffers. Instead of having the government control the flow of capital, we recognize the profit motive and a free market price system to give these signals. I guess if every corporation knew how to manage its finances, acquisitions, etc. without any outside help then banking would be a scam. I don't think that's the case, though.

I would like to note several fallacies the author makes as well:

1) He criticizes bankers for not propagating hysteria about Black Swan events that he admits are difficult to predict and rare, supposedly because of a desire for bonuses.
2) We should assume bailouts are here to stay forever.
3) Incentive-based pay leads workers to be less-productive than salaries.

All-in-all, fuck this guy.

I don't buy the idea that investment bankers are necessary to efficiently and and effectively allocate capital. I think the government would be even worse at that game, but my gut says the amount withdrawn from markets by bankers exceeds whatever value they add, in the context of efficient allocation of resources. I suspect, without having numbers to make a legit argument, that the effect of a world without IB as we know it, would be net positive.

I guess it's a good counter argument is to say "if that were true, why do bankers exist?". My only answer is that it's an entrenched system that was worth what it cost 100 years ago, and is too powerful to be banished today.

Nov 9, 2011
djfiii:
lolbaringslol:

I can't wait for the NYT to go bankrupt, what a rag. This Glass-Steagall bullshit is really getting old too, considering how important deposits were for liquidity at banks like JPM during the crisis. Oh, so you want to take away the largest and most stable source of capital so there's less catastrophic risk? Good idea, fucknut socialists.

I wouldn't say the idea of investment banking is leeching. Lending is perhaps the most tangible aspect of it, but I'd argue that investment bankers who actually care about making the right deals are of some of the highest value to the economy on a per capita basis. If capital isn't going to the right places, the economy suffers. Instead of having the government control the flow of capital, we recognize the profit motive and a free market price system to give these signals. I guess if every corporation knew how to manage its finances, acquisitions, etc. without any outside help then banking would be a scam. I don't think that's the case, though.

I would like to note several fallacies the author makes as well:

1) He criticizes bankers for not propagating hysteria about Black Swan events that he admits are difficult to predict and rare, supposedly because of a desire for bonuses.
2) We should assume bailouts are here to stay forever.
3) Incentive-based pay leads workers to be less-productive than salaries.

All-in-all, fuck this guy.

I don't buy the idea that investment bankers are necessary to efficiently and and effectively allocate capital. I think the government would be even worse at that game, but my gut says the amount withdrawn from markets by bankers exceeds whatever value they add, in the context of efficient allocation of resources. I suspect, without having numbers to make a legit argument, that the effect of a world without IB as we know it, would be net positive.

I guess it's a good counter argument is to say "if that were true, why do bankers exist?". My only answer is that it's an entrenched system that was worth what it cost 100 years ago, and is too powerful to be banished today.

What would you identify as the source of this transition, assuming your premise is true? Banks going public?

Nov 9, 2011

Posting this on a Wallstreet aspiring monkey forum is the equivilent of posting "god hates fags" on a LGBT forum. You might really, really believe something to be true, but we really dont give a fuck. We're here to make money, bonuses are here to stay.

Nov 9, 2011
porsche959:

Posting this on a Wallstreet aspiring monkey forum is the equivilent of posting "god hates fags" on a LGBT forum. You might really, really believe something to be true, but we really dont give a fuck. We're here to make money, bonuses are here to stay.

^^^THIS

Nov 9, 2011

Bonuses are just part of the compensation structure. Companies will find other ways to reward their traders and analysts if it becomes too difficult to pay them. The Times is ridiculous.

Metal. Music. Life. www.headofmetal.com

Nov 8, 2011

Duff, I read the article. I am for Glass Steagal. I am strongly against government attempting to regulate pay of a private corporation.

I am also 100% against bailouts.

Nov 9, 2011
txjustin:

Duff, I read the article. I am for Glass Steagal. I am strongly against government attempting to regulate pay of a private corporation.

I am also 100% against bailouts.

These corporations are only quasi private in their existence as Too Big to Fail entities. It's like they have an invisible revolver with the US government. Until something is done to structurally change this, I have difficulty taking much issue with the author's POV that their pay should be regulated. This goes for Fannie and Freddie as well, obviously.

Nov 9, 2011
duffmt6:

These corporations are only quasi private in their existence as Too Big to Fail entities. It's like they have an invisible revolver with the US government. Until something is done to structurally change this, I have difficulty taking much issue with the author's POV that their pay should be regulated. This goes for Fannie and Freddie as well, obviously.

I don't see how regulating pay solves anything. Under that scenario you let the TBTFs keep their revolver but put it in the hands of lower paid executives. The only solution is to take away their gun.

Pro Glass-Steagall.

Nov 8, 2011

I think the repeal of Dodd-Frank and reinstitution of Glass Steagal would solve this, no?

Nov 9, 2011

Reinstitution of Glass Steagall would pretty much nullify the need for parts (most) of Dodd-Frank.

Essentially you are agreeing with the author of the Op Ed. He wasn't being a Communist by suggesting that these "private corporations" aren't actually private, and therefor should be subject to the same scrutiny as public institutions.

Nov 9, 2011

Gekko says:
This turkey is totally braindead!

Nov 9, 2011

under glass stegall were investment banks allowed to offer bridge financing

Nov 10, 2011

Why not get rid of ALL the government subsidies and guarantees? I can think of no other industry that receives as much as banking.

I am not cocky, I am confident, and when you tell me I am the best it is a compliment.
-Styles P

Nov 9, 2011

I miss when we lived in a society that didn't feel compelled to dictate everyone's income...

How will eliminating bonuses solve anything or help anyone? Somehow, I doubt the Times would complain if teachers or other public servants were paid enormous bonuses. That would be public money too, wouldn't it?

Metal. Music. Life. www.headofmetal.com

Nov 9, 2011

That's not really the point. I think we all agree that we don't want the government dictating incomes for private industry. The issue in question is whether or not banks should be considered private industry. The whole premise of letting the market dictate winners and losers goes out the window if the participant in question absolutely can't be allowed to lose, i.e. if they do, the rest of the ship goes down with them. That knowledge allows them to take risks knowing there is no downside, which flies in the face of a market driven system (i.e. we subscribe to a market system in part because we know it enforces an upper bound on risk taking, because participants are self interested and want to avoid bankruptcy).

Since we built a system that relies entirely on day to day IOU's (i.e. intra bank overnight lending, commercial paper, lines of credit, etc.), it's a fact that if banks stop lending, EVERYTHING grinds to a halt. Since they know that, they take risks far in excess of what they would if bankruptcy was really on the table. For you cheerleaders beating the drums of a true free market - the current banking system isn't it. It's an entrenched system that gorges itself on the upside of massive risk taking, and insulates itself from the downside with taxpayer money.

Nov 8, 2011
djfiii:

That's not really the point. I think we all agree that we don't want the government dictating incomes for private industry. The issue in question is whether or not banks should be considered private industry. The whole premise of letting the market dictate winners and losers goes out the window if the participant in question absolutely can't be allowed to lose, i.e. if they do, the rest of the ship goes down with them. That knowledge allows them to take risks knowing there is no downside, which flies in the face of a market driven system (i.e. we subscribe to a market system in part because we know it enforces an upper bound on risk taking, because participants are self interested and want to avoid bankruptcy).

Since we built a system that relies entirely on day to day IOU's (i.e. intra bank overnight lending, commercial paper, lines of credit, etc.), it's a fact that if banks stop lending, EVERYTHING grinds to a halt. Since they know that, they take risks far in excess of what they would if bankruptcy was really on the table. For you cheerleaders beating the drums of a true free market - the current banking system isn't it. It's an entrenched system that gorges itself on the upside of massive risk taking, and insulates itself from the downside with taxpayer money.

Amen

Nov 9, 2011
djfiii:

That's not really the point. I think we all agree that we don't want the government dictating incomes for private industry. The issue in question is whether or not banks should be considered private industry. The whole premise of letting the market dictate winners and losers goes out the window if the participant in question absolutely can't be allowed to lose, i.e. if they do, the rest of the ship goes down with them. That knowledge allows them to take risks knowing there is no downside, which flies in the face of a market driven system (i.e. we subscribe to a market system in part because we know it enforces an upper bound on risk taking, because participants are self interested and want to avoid bankruptcy).

Since we built a system that relies entirely on day to day IOU's (i.e. intra bank overnight lending, commercial paper, lines of credit, etc.), it's a fact that if banks stop lending, EVERYTHING grinds to a halt. Since they know that, they take risks far in excess of what they would if bankruptcy was really on the table. For you cheerleaders beating the drums of a true free market - the current banking system isn't it. It's an entrenched system that gorges itself on the upside of massive risk taking, and insulates itself from the downside with taxpayer money.

This is a more eloquent version of what I was trying to say earlier. Good post.

Nov 13, 2011

That's not really the point. I think we all agree that we don't want the government dictating incomes for private industry. The issue in question is whether or not banks should be considered private industry. The whole premise of letting the market dictate winners and losers goes out the window if the participant in question absolutely can't be allowed to lose, i.e. if they do, the rest of the ship goes down with them. That knowledge allows them to take risks knowing there is no downside, which flies in the face of a market driven system (i.e. we subscribe to a market system in part because we know it enforces an upper bound on risk taking, because participants are self interested and want to avoid bankruptcy).

Since we built a system that relies entirely on day to day IOU's (i.e. intra bank overnight lending, commercial paper, lines of credit, etc.), it's a fact that if banks stop lending, EVERYTHING grinds to a halt. Since they know that, they take risks far in excess of what they would if bankruptcy was really on the table. For you cheerleaders beating the drums of a true free market - the current banking system isn't it. It's an entrenched system that gorges itself on the upside of massive risk taking, and insulates itself from the downside with taxpayer money.

Brilliant post.
And yet, would reinstating Glass-Steagall really solve that problem? I don't think so. There would still be banks and shadow banks out there that could crash the system on failing.

Nov 9, 2011

Well, obviously there is a lot of subjectivity and opinion that enters into the conversation when you start talking about the fix. Fingering the problem is always the easy part.

My personal view is that lending should be treated as a utility, so remove the profit motive. I'll jump right to the conclusion and suggest that (in my opinion) price speculation with borrowed money is the root of the problems we're working through today. The rest of banking activity as it exists today should be spun off, and they can live or die by their own abilities.

In all cases, a fairly strict and uniform set of criteria should be put in place that spells out who is qualified to borrow. So, for example, it's no coincidence that when people had to come up with 20% cash down for a house years ago, there were far fewer defaults. People are more heavily invested at that level, and thus less willing to walk away. It also adds a bit of self selection, because anyone capable of saving that kind of cash has already demonstrated some of the characteristics we (from a systemic point of view) want to see out of a person or business borrowing from that system. Lastly, it hugely inhibits speculation because people generally aren't going to make speculative investments when a large chunk of the money is their own cash. Similar criteria could apply to loans for everything from homes, to cars, to education loans, to corporate loans for operational financing, or capital expenditures, etc. Each entity should be sufficiently invested that there is proper incentive not to default.

Beyond that, we get our arms around some good models for measuring NPV, to have some basis for determining if the risk of loan default is at an acceptably low level. Set interest rates at a level sufficient to cover expected loan losses, and pay some delta to depositors. Keep the number of institutions relatively high, at the expense of some economies of scale, so that any one failure is immaterial to the whole. At the end of the day, you're always going to have ventures that fail. But it seems to me that we want a system that promotes investment only in the directions in which people have a good shot at generating value in excess of the amount borrowed. Speculation is not value creation.

The obvious and glaring downsides are:

  • less speculation means less risk which means less profit. A lot of people got rich flipping houses. But that adds layers of speculative buys to cumulative prices, and eventually that bubble pops. We can't have it both ways, which I think is a large part of my point. If commercial banks are profiting because they are churning out more and more loans year after year, at lower and lower rates, you have to conclude that all of that money is feeding upward pressure on prices SOMEWHERE in the economy. Maybe it's housing, maybe it's education, etc. It doesn't really matter what part of the economy it is; if we're feeding a speculative price layer with borrowed money, it's basically just a short term wealth transfer where the speculators skim off the profit, push up prices as far as they can before everyone realizes that they have reached an unsustainable level, and then it crashes back to the point where real consumption demand sustains it.
  • more restriction on lending means slower economic growth (largely because you've eliminated the artificial component from speculation)
  • lots of room for cronyism, racism, and other "ism"'s in a system where it's harder to get loans, and we're adding a lot of criteria to decide who gets them, why, how, etc.
  • probably more that i'm not thinking of b/c I'm tired.
Nov 14, 2011

"Without bonuses, first-year's base salary would be 130k."

Nope, they'd still be 70k or whatever and the kids would still be lining up. what other jobs can you get straight out of college that pay that?

Nov 9, 2011
Jimbo:

"Without bonuses, first-year's base salary would be 130k."

Nope, they'd still be 70k or whatever and the kids would still be lining up. what other jobs can you get straight out of college that pay that?

Boom. Wake up and smell the coffee, fellas.