Reply #23: Daily Reckoning's Apologia for Bankers (What CAN They Be Thinking?)

[Demeter]

http://www.dailyreckoning.com/Issues/2009/DR012309.html

People working in the financial sector got paid better than any other professional class...
...which didn’t seem so bad, says Floyd Norris in the New York Times, when they appeared to be the smartest people on the planet. But now that we’ve discovered that they were the world’s biggest dumbbells, the high salaries add insult to injury.

In the Bubble Epoque, every mamma wanted her baby to grow up and be an investment banker. Because that’s where the money was. Now...the money ain’t there no more. The banks are broke. And the people who work in the financial sector are taking big pay cuts. First, their bonuses – which depend on the profitability of the industry – are cut automatically. Then, their salaries will come down too.

Financial sector salaries rise with the credit cycle, says a study done by the National Bureau of Economic Research. “Wages in finance were excessively high around 1930 and from the mid-1990s until 2006,” says the report. When animal spirits run high, in other words, the financial industry is able to make a buck. When they run low, earnings and wages in the sector fall. And when earnings in the financial industry go down, so do the economies that depend on them.

It was not a coincidence that New York City went broke in the ’70s, says the report. Speculators were few, credit was low, and the financial industry was in a slump. Coming soon: lower property prices in Manhattan and London.

Mommas should now be urging their babies to go into other lines of work – politics, maybe. The whole financial sector is busted. And if the financial sector is broke, the rest of the economy can’t function – at least, that’s the argument. So, the politicians and economists are desperately looking for solutions. What solution do they find? Shift more power and money to...surprise...politicians! The bankers may be broke, but the politicians act as though money is no problem. “How much do you need,” they ask?

“Don’t insure the banks – nationalize,” writes James Saft in the International Herald Tribune . He believes nationalization – complete government takeover – is the cheapest and most efficient way to bring the banks back to life.

Just a few months ago, ‘nationalization’ was practically a dirty word. No one – except a brain-dead Bolshevik – would have thought it desirable for a government bureaucracy to manage capitalism’s money. Now, few people can think of anything better.

The idea is typically simple-minded. When the bankers saw high earnings and no risk, the last thing they wanted was interference. Like gangsters, they would fight to keep rivals from muscling into their territory. But now, the wages of sin are going down...and the risks seem too high. They’re facing bankruptcy and they’re discouraged.

Everyone wants to offload the risks of the financial sector onto the taxpayer.

But wait...how can capitalism work without capitalists running its most important industry? And of course, there’s the additional cost. In private hands, the financial sector allocates capital and takes risks. The bankers make mistakes...but are least their intentions are pure; they are motivated by greed. In the fat hands of the government, on the other hand, decisions will be more political – they will be made to appease pressure groups, to favor trendy causes, to pay-off supporters or punish opponents. From an economic standpoint, these will slow down real growth...and cause strange misallocations of capital and financial distortions. Instead of being driven by naked, honest greed, in other words...the economy will be whipped forward by corruption, favoritism, and hidden political agendas.

Here at The Daily Reckoning , however, we are squarely against nationalizing the banks. Not that we think bureaucrats won’t do as good a job; how could they do worse? We just don’t think they’ll be as much fun to watch....



Today, when you get a check marked “insufficient funds,” you don’t know whether it is you or the bank that is out of money. And so, the authorities on both sides of the Atlantic rush to make their deposits, before the banks close forever. If it were up to us, none of them would get bailouts. Not because it would be the best thing to do for the economy; we just like to see grown bankers cry. It is good for them; we will explain why. Read on...

SUPER BAAADDDD
by Bill Bonner

Bankers are idiots, sometimes

As a professional class, bankers are thought to be as immoral as Russian pimps and as incompetent as Renaissance electricians. Thanks to them, the banking system is in trouble. Thanks to the failure of the banking sector, the American and UK economies are in trouble. And thanks to the failure of the Anglo-American economy, the whole world is in trouble.

Everyone is on the bankers’ case. In France, even Jerome Kerviel is criticizing his bosses at Societe Generale for not preventing him from taking “crazy risks.” Meanwhile, in Britain, Sir Fred Goodwin, recently esteemed head of the Royal Bank of Scotland, is now said to be the “world’s worst banker,” according to the Times . Trevor Kavanagh, writing in the SUN , says he is “criminally incompetent.” His purchase of ABN Amro is said to be the “worst acquisition in history.” In the new world, meanwhile, ISI group figures that the top four US banks alone have $1.2 trillion in bad assets. The total market value of those four banks is only about half of that amount. The banks are ‘effectively insolvent,’ says Nouriel Roubini. So, the feds have taken them into their care, if not yet into their custody.

But the bankers are ingrates. They borrow, but they don’t lend. They take but they don’t give. They party ’til the wee hours...and then, when the bill is served, they play dead.

The New York Times reports: “At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money.

“Make more loans?” Are you kidding, Mr. Hope seemed to say: “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector....”

Bankers don’t make loans in the hopes of getting ‘good citizenship’ awards. They lend money when they think they can make a buck. The remarkable thing is that they’re so bad at it. They lent recklessly when there was little hope of getting their money back. Now, with the widest spreads in history – the difference between their cost of money and their return on it – it’s easier to rob a bank than get a loan from one. There are two explanations for this anomaly – both of them wrong.

The first is that bankers are wicked. A report in the Daily Express , for example, tells us that RBS “bosses spend 50k pounds on champagne banquet” celebrating Burns Night on Friday, before announcing a 45 billion pound loss on Monday morning. Over in the United States, the Wall Street Journal gave out word on Tuesday that much of the $140 million donated to fund the biggest inauguration in history came from banks that had received bailouts.

But wait, say the bankers’ defenders; they’re not evil, they’re just incredibly stupid. Evil bankers might have sold sub-prime debt to widows and orphans, but they never would have kept it in their own accounts. At the end of 2007, for example, the aforementioned Sir Fred Goodwin had shares of RBS worth nearly 6 million pounds; now his pile will barely buy a mid-size apartment in a bad section of London.

We do not reject the ‘bankers are stupid’ hypothesis completely; we simply add an important nuance: they are not stupid permanently; they are – like the rest of us – only stupid episodically.

Among the queerest financial stories of the last week was the proposal to create a ‘bad bank.’ It hardly seemed necessary. There were already dozens of them. The idea is to transfer all the sins of the bubble era to the ‘bad bank’ – funded with public money. Then, the bad bank will be crucified so that the rest of us can have life, and have it more abundantly. We first saw the idea floated in the pages of the New York Times last week. Now, it has made its way to the Financial Times in London, gaining favor as the measure of sin increases. The SUN says British taxpayers are on the hook for as much as 2 trillion pounds. In America, the bankers face $3.5 trillion in losses, says Mr. Roubini.

But if the ‘bad bank’ idea could work, why not create a super baaaddd bank? We could use it to get rid of all our mistakes. Writers could unload their bad novels. Businessmen could sweep their errors under its broad carpet. What the heck, let people get out of bad marriages without penalty; the super baaaddd bank could pay the alimony and divorce costs.

The hitch with the bad bank idea is so obvious even a banker could spot it. If the cost of mistakes is reduced, people might make more of them. Like the rest of us, bankers are neither good nor bad, but subject to influence. Unlike metallurgy or particle physics, banking does not have a rising learning curve. It’s not science. Instead, it’s more like love and gambling...with a circular learning pattern. They learn...and then they forget. They get carried away in the boom upswing; then they get whacked when it turns down.

So let them have a good beating. It will give them of a lesson that will last a lifetime...and give the next generation a solid banking sector.

Enjoy your weekend,

Bill Bonner