Paul Krugman: Money for Nothing

Will bankers escape new regulation and get off with “nothing more than a few stern speeches”?:

Money for Nothing, by Paul Krugman, Commentary, NY Times: …Sanford Weill, the former chairman of Citigroup,… insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after…, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. … All of which explains why we should be disturbed by an article … reporting that pay at investment banks … is soaring again — right back up to 2007 levels.

Why is this disturbing?… First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks. …

So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

Consider a recent speech by Ben Bernanke … in which he tried to defend financial innovation. His examples … were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?

Still, you might argue that … it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.” …[G]iven all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing. …

Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.

Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.


Originally published at the Economist’s View and reproduced here with the author’s permission.

5 Responses to "Paul Krugman: Money for Nothing"

  1. m. goulimis   May 1, 2009 at 3:39 am

    in europe the state owned banks have reacted better to this crisis. Their compensation model have mamy characteristics of the the so colled aglo-saxon model.Why is that? Because ,thanks to the fact that the top management is mostly elected by the goverments , there is the neccessary change every time that a different political party is in power.On the contrary, the management in the private owned banks doesnot change easily.The court of the CEOS remains the same for long time period and it is easile to take total contro of the entire organisation. Democracy , is not a political issue. It is a way of running things, even in the every day life. The lack of transparency, is an easy excuse.

  2. Brent A. Hill   May 1, 2009 at 11:13 am

    You are right on Paul. If the government had not bailed them out this debate would not be taking place. It is a scam that Paulson bailed banks and Wall Street out with our money in the name of “panic” while he rides off in the sunset with his $500M trust. Who was he really protecting?

  3. Anonymous   May 1, 2009 at 2:41 pm

    words matter. ‘make’ and ‘earn’ are different verbs. should any executive’s pay include a component to insure his actions are in line with the interests of shareholders? that’s part of the job he hired on to do.

  4. Guest   May 3, 2009 at 7:29 pm

    The first is to say, knowing the actors involved in making these key decisions, they are highly valued and that determines their pay scale. They are valued because of their networking capabilities, especially in a recession. They actually exchanged assets/liabilities with each other to create an internal market that beefs up prices of losing assets. They have these networks because of the migration from bank to bank, and clubs. The only ones that they are responsible to are share-holders, the shareholders rely on knowledge of seasoned bankers. Especially now where the structure of banking is back to basics of banking. BofA CEO was let go, mostly his indecisiveness on what to do with the Merrill. He didnt really move as fast as Chase did with WAMU.The IMF, World Bank and other organizations have text book solutions on how to handle banking crisis, its updated with figures ect…. But really its not going to curtail the banking business. Neo-liberal ideals. Obama said he wishes he could implement some type of prosecution remedy, but he cant, everything the banks did was completely legal. He mentioned the fed can form consumer protection laws on financial products, this just increases transparency.But ultimately they got away with it. I just hope they learned a lesson in risk-management and learn about timing markets, and learned that just because your competitor is making profits and high risk doesn’t mean every bank has to do it. They took the high risk on high profits and they lost. Yet, they got paid a lot of money for it. Maybe we should be bankers, at least we can time markets better than they can?That begs the question dont these trillion dollar holding companies have lead economists working for them that advise them on market conditions? Is that an oops factor? Asking for billions of dollars in government support, signals something about the intellect of their economic advisors.That begs another question, were the economists ignored? Or where they stupid? Was it greed? or ignorance? Both?— bad combination.What is impressive is the scale, so many banks. geez. That begs another question, the education of those in these institutions. Reading from the same play book? I have heard that those that didnt play where fired and those that conformed made money. — and that is the cycle.So restructuring is a human resource issue, and that goes back to the pool of those that have networks and are in clubs.

  5. Hootsbuddy   May 5, 2009 at 7:16 pm

    Occasionally a writer talking about matters economic will let slip a telling reference to “the real economy.” Whenever I come across this reference I tend to go back to the start of the article and read it again, this time with a better attitude, thinking that maybe this time I could be reading the ideas of someone who “gets it.”Those of us who use credit sparingly (house, car, cards paid in full monthly with no interest, etc.) have known for years that the best way to make money is to earn it the old fashioned way and the best way to save it is to not spend it. Quaint. Primitive. Boring. But it became clear to me long ago that financial prestidigitation is only that. So we allow big shots to be overpaid in that line of work in just the same way that sports figures and entertainers get small fortunes for big muscles and seductive smiles.Financial wizards have been piling up what passes for profits for years without creating any real value by the application of mergers and acquisitions. Two like companies combine to make one larger because the economy of scale eliminates big chunks of overhead. One marketing department instead of two. Same for payroll, accounting, middle management, etc. Oh, and one more competitor is out of the running as well. So a merger is announced, many jobs are eliminated and the stock price goes UP,Something wrong with that picture, including the fact that nothing new, no real value, is forthcoming.It’s bad enough in the “real economy” but when it happens in the world of finance, we see the ultimate magic trick. Toss in what they call “structured” investments and other exotic spin-offs and you have a swamp in which Bernie Madoff can dwell for a decade or longer undetected.”…restructuring is a human resource issue, and that goes back to the pool of those that have networks and are in clubs.”Pool, indeed. We need to be sure it’s not a cesspool.