Wednesday, February 2, 2011
Moral hazard alive and well
JJ is still having problems accessing the blog. So here is one for today (sorry about yesterday). Those in the large banks are making record salaries this year after a record-breaking last year. See here. Do you really believe they are being paid the value of their marginal product or is this looting as a result of moral hazard?
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One quote from the article really stood out: "If you steal $1000 from the local convenience store, you go to jail for ten years. If you steal $100 million, you get called before Congress and get called bad names for ten minutes." This pretty much sums up how ridiculously unfair it is that these hot shot investment bankers can get away with so much only to receive a smack on the hand. I think this looting is the result of moral hazard. The fact that these executives, traders, and other employees will most likely get a yearly cash bonus, regardless of their performance, causes them to take unwise and high risks. Once they're insured with these cash bonuses and expectations of no governmental punishment, they aren't as careful and will do anything they can to get a big payday.
ReplyDeleteI highly doubt that these banking executives are being paid the value of their marginal product. This portion of the article stood out to me the most:
ReplyDeleteThe profits the banking industry is showing is heavily dependent on government subsidies: super low interest rates, regulatory forbearance, and its kissing cousin, dubious accounting (for instance, a lot of banks have been underreserving). So these are not in any normal sense private sector profits, yet we allow the banking industry to maintain that they are and pay a ton of these fictive returns out rather than retaining them to bolster their equity bases.
If these aren't private sector profits then why hasn't the government stepped in and done something to fix this? I don't understand why they just don't seem to care.
Yep, I agree with Kaitlin. That quote really makes you think how differently things look depending on where you sit. It makes me quite uncomfortable that these big banks are just able to do as they please just because they have the government behind them to bail them out. As we talked about in class, this is a result of moral hazard AND it is unfair that these banks get the benefits of the profits but don't need to take responsibility for the huge losses. How can we keep putting more money and invest more trust into them when their seems to be unlimited power in the future? Baffling, and how to limit them after what we have done will likely be impossible.
ReplyDeleteThese bonuses are symptomatic of current corporate culture. CEO's are paid millions, not because it is reflective of what money they pull in for their company, but in order to provide incentive for them to stay at said company. This is against many basic labor principles we learned in Macro. Moral hazard is rampant in this system. When CEO's are compensated so enormously, they feel entitle to take needless risks or maybe not try as hard.
ReplyDeleteGood points made all around.. I'm with Ashley and feel like as long as these selfish upper level managers have the possibility of behaving as they are with little (if any) consequences, there's no logical reason why they wouldn't rob from the rich and keep for themselves. These men and women are just persuing their own self interest and screwing anyone who has a problem with it.
ReplyDeleteWhy doesn't the government take a more authoritative role in these types of situations?
Bankers are not being paid their marginal product... they receive tons of benefits via deferrals. This trend, like ashley said, is across the board.
ReplyDeleteI agree with the rest of the class, bankers pay across the country definitely does not reflect the amount of money in accounts that they handle. It is scary to see how easily they can get away with stuff like this. Moral hazard is clearly a big problem in the banking industry.
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