…Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a “systemic crisis” or a “black swan” for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.
If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him – only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives.
One of the issues that comes up in predictions about political prospects is that the party in power tends to be buffeted by the business cycle, and receives both the credit and the blame, even though they may only control the dynamic to a modest extent. In this way many of the large financial firms resembled governments; they blew up on the bubble, and now with the collapse it’s rather clear that they didn’t add all the value that they claimed. But as readers have pointed out on an individual level those who received windfalls through a winner-take-all-system have no incentive to avoid risks. I think the chance of non-trivial clawbacks is close to zero (I’ll be happy to be proven wrong!).
The contrast with entrepreneurs is telling. The .com bubble & burst was tragic, but it did produce notable technologies, the seed of later gains in economic productivity. The asset and finance bubble seem unlikely to generate the same positive externalities in the wake of correction of irrational exuberance. But all that being said, even though we are moving past an age of massive economic parasitism due to principle-agent problems the potential engines of productivity through innovation remain. There are still entrepreneurs, and with the shrinking of the financial industry the pool of those who engage in the real game of risk and reward is increasing in size.