Friday, January 28, 2011

Are Bankers a Bunch of Greedy Bastards?

Well, are they? Raghuram Rajan thinks not, or not especially, or not really more than the rest of us. It's the system:
It is not that bankers are excessively greedy. ... Rather, their willingness gto exploit any advantage that will help them make money, however dodgy (albeit legal) it m ay be, stems partly from the nature of competitive banking, where there are few easy opportunities to make money, and partly from the way banker performance is measured--almsot exclusively by how much money the banker makes rather than by her impact on real activity. The disconnect between banking and real lives and livelihoods is most apparent in arm's-length financial systems that are found in countries like the United States and the United Kingdom.

A second lesson is that bankers invariably find the biggest edge in taking advantage of unsophisticated players or players who do not have the same incentive to make money,. Clearly, individuals who are unschooled in finance are a potential target, but often these individuals realize their ignorance and give their custom only to trusted intermediaries. Moreover, they typically have too little money to be of interest to the smartest bankers. More attractive targets are the moderately schooled managers of large pools of funds, such as pension funds or foreign state-owned funds, who know not that they know not and are thus easily taken advantage of. But perhaps the most attractive target of all is the government itself. The government has nonmarket, noneconomic objectives, and however astute its representatives may be, these make it easy prey for clever bankers. Moreover, whereas a naive individual is soon relieved of all his money, the government has deep pockets, and exploiting them can sustain many a banker's luxurious lifestyle for a long time.

Third, banker behazvior tends to be self-reinforcing, at least for a while. ... This behavior can exaggerate investment trends and move prices far away from fundamentals. Early movers may convince themslves they are geniuses, even though they are only the leaders of a herd that is rapidly headed toward a cliff. ...

Finally, there is safety in numbers, because the responsible government cannot let all its bankers fail, given the likely collateral damage to the citizens.
Rajan, Fault Lines.  It's a beguiling thought and the whole book bears careful reflection.  But I think here he may be overlooking selection bias: the fact the kiddies who assault the purlieus of the great banks are the ones most at home with these kind of constraints, least in need of conditioning to the new déformation professionnelle. And if they aren't that way coming out of the box, what is the purpose of an MBA program except to school them in this kind of studied indifference?

1 comment:

dilbert dogbert said...

"what is the purpose of an MBA program except to school them in this kind of studied indifference? "