Money for nothing

Money for nothing

Here’s the funny thing, so far governments have not actually taken this crisis seriously. Oh, they know it’s bad, and they intend to do some stuff to sort of fix it, mostly by running printing presses hot and giving money to bankers, then trying to make sure that money doesn’t get to the real economy and cause inflation (though you will be expected to pay for the bankers bailout, be sure of that. They sure won’t be.)

Let’s use an analogy. You’re in charge of a large company and for years your finance division has been racking up huge profits. It’s gone from 10% of your profits to 40%. You’ve been paying the VP in charge of that sector and his senior executives huge bonuses, hundreds of millions every year. Why not? They deserve it, they’re bringing in money by the truckload.

Then one day the VP comes to you and says "actually, we’re so far in debt that we’re going to require a huge infusion of money from the rest of the company, and we might even destroy the company the debts are so large."

You reply "but I thought you were making record profits? How can it be that you actually have such massive losses?"

"Well," he says, " we were lying about the profits, we were leveraging massively, we were cooking the books, we were booking future profits from as present income and so on. Most of the profits were bogus, but the debts are real."

What would you do? What is the first thing you would do? You would fire him. What’s the second thing you would do? You would put someone else in charge, someone you trusted and probably someone who isn’t from the Finance division. What’s the third thing you’d do? You’d probably sue the bastard to try and get as much money back as possible, and you’d try and get as much money back from his executives, all of whom were complicit in the fraud.

The government equivalents would be to insist that any company being bailed out gets a new board, new management and that both of those are government controlled. If you’re going to fail without government help, well then, you don’t get to still be in charge, because at best you’re incompetent and most of you are actually crooks.

You would cap executive compensation. You would tax the people who benefited from the fraud to get the money back that you are using in bailing the companies out. You would tax the financial sector going forward to cover the risk of them screwing up again.

If you aren’t doing these things you aren’t serious. Leaving the same people in charge who caused the problem means that it will inevitably happen again. It is also bone stupid in terms of trying to fix things—these people are incompetent and crooks, why would you want them in charge of fixing the corporations they themselves broke?

Despite all the screaming and running around, at core governments aren’t taking this crisis seriously. They think they can paper it over by throwing enough money at it, that they can get the middle class to pay for bailing out the rich, and that they can go on with business as usual.

Stirling calls this the world’s "1925" moment. Not 1929, because they can probably do it, for a little while: for a few years. But it sets up the next crisis, and that one they won’t be able to paper over. He may be wrong, he may be right, but what I will tell you is this: leaving the people in charge who caused the crisis, leaving in place the incentive systems (i.e., compensation) that caused them to behave as they have, means that they will do it again. Why not? They got all the profits as salary and bonuses, taxpayers cleaned up the mess. Why wouldn’t they do it again? What, exactly, is the downside for most of them?

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