At least one of the factors contributing to the world financial crisis of the last few days has been the recklessness of the American banks in lashing out mortgages without regard to the capacity of mortgagees to repay their loans in the longer term, writes Vincent Browne
Quick bucks were there to be made and, by God, quick bucks were made in abundance.
One of the banks that has suffered most in recent months because of the recklessness of its senior executives is Merrill Lynch. It got rid of its CEO, Stanley O'Neal, last autumn, having announced losses of $8 billion. Stanley got a compensation package valued at $161.5 million.
Morgan Stanley wrote down $10.3 billion in bad debt in 2007. Its CEO, John Mack, wasn't given the door, instead he graciously declined a bonus for 2007, having got a bonus of $40 million in 2006. Citigroup had losses of €20 billion and it did give its CEO, Charles O Prince III the door and on his way out it gave him a "dig out" of $68 million in severance.
The way bankers get paid probably contributed to the crisis that will devastate the lives of millions worldwide. Raghuram Rajan, a former International Monetary Fund economist writing recently in the Financial Times, stated as much. He explained that securities trading nowadays is often based on falsified analysis of financial data, which yields for the traders huge bonuses, and that this was at the core of the hedge funds crisis.
Martin Wolf, an associate editor of economics at the Financial Times, wrote in response to Rajan's article: "I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important - the political legitimacy of the market economy itself - across the globe."
The problem is that the whole system is founded on these massive rewards for an elite, inevitably, at the expense of the majority. In the US in 2007 there was a decline in living standards generally, with a fall in average weekly wages of 1 per cent.
Here, we have done something similar. Developers and professionals in particular have made spectacular wealth in the last decade, while the majority have made modest gains.
The Irish Timesreported on some of the major developers in a series last autumn and showed how they have all become close to billionaires out of the building boom that the financial sector fuelled. Vast incomes have been earned by the senior executives in the banks with several senior managers earning well over €1 million per year, one earning over €3 million.
But it is not just them. Lawyers, accountants and other professionals regularly charge over €400 per hour for their services. One well-known family law solicitor demands €500 per hour from his clients. Some barristers now charge in the region of €0.5 million for brief fees in major cases. The sums made by lawyers, stockbrokers, bankers and accountants from privitisation deals are gigantic.
And all this is regarded as okay, as justified by the "market" as though the "market" was some kind of impartial moral arbitrator of how society's wealth should be distributed.
George Bush's response to the US financial crisis was to extend the deadline for his tax cuts for the wealthy past their 2010 expiration date. How anybody thought this would do anything to relieve the current crisis is unclear (at least to me) but it certainly was a fine reward for the crowd that has most responsibility for the crisis.
An obvious and immediate stimulus for the economy would have been to increase welfare benefits - the poor would spend the money immediately, thereby giving an immediate stimulus. But even when it is in the interests of the economy as a whole, this can't be done.
When are we going to cop on that the social system we live in is irredeemably biased in favour of a rich elite against the interests, not just of the poor but of the majority?
There are a few other oddities about this present crisis. Wasn't the world economy supposed to be "globalised", less prone to turmoil in individual or even regional economies? Remember the "crisis" caused by the turmoil in Asian markets a decade ago, which caused a worldwide "crisis" called the "Asian contagion".
Wasn't all that supposed to be in the past but now we have an American "contagion"? China is growing at about 11 per cent per annum, India at about 9 per cent, the EU at about 2 per cent. Even the US is likely to show growth. So what is this worldwide "crisis" about?
One thing is sure. There are young moles buried deep in financial centres here and around the world, watching gleefully the unfolding "crisis", seeing the main chance to make a few quick millions on the turnaround that is sure to come on the stock markets as quickly as the "crisis" has occurred.
Every cloud has a silver lining, actually a gold lining, for the masters of the universe.