There’s no doubt Wall Street’s over-leveraged risk-taking was a key cause of the financial crisis. Many critics charge there has been little or no accountability. And yet, will putting bankers in jail do any good?
Parag Khanna: Welcome to the Global Roundtable. This series focuses on the Future of the Economic Competition. I’m Parag Khanna, joined by a very distinguished panel including: Dambisa Moyo, Daniel Altman and Anand Giridharadas. Today we’re focusing actually on whether or not bankers should be thrown behind bars. And there are all kinds of cliché’s now about how Wall Street should be treated in the aftermath of the financial crisis, you know, they privatize gains and socialize losses and so forth, but we haven’t really answered the question because not enough has actually been done about it. So, what are we going to do with the bankers?
Daniel Altman: Well, I think we need to treat them the way we would treat people who make mistakes in almost any sector. We need personal responsibility because right now, the buck stops with shareholders. And when it’s taxpayers picking up the bill or a bunch of shareholders, we’re diffusing the responsibility away from the people who really make the bad choices. And they are the executives. We need personal responsibility for them; we saw it with Sarbanes-Oxley when CEO’s and CFO’s had to personally sign their financial statements. All of a sudden they wanted to know what was in them. Right? That’s a big step in the right direction.
Dambisa Moyo: I think that absolutely. Most people who work in the financial industry, including the people who run financial institutions will agree that something went wrong. But I think to focus specifically on bankers and penalizing bankers without really looking at the broader contexts is to miss a bigger point, which is that the responsibility of government is to provide free public goods, things like education and healthcare and infrastructure and so on. Its responsible… the governments are also responsible for provision of regulation and also for setting a policy environment that makes things work. Those are the three responsibilities of government and it’s absolutely clear that in the context of derivatives and in the context of the financial crisis that the government has definitely fell down.
Parag Khanna: We have yet to find this middle ground between the government responsibilities to regulate and yet the economy and the business sectors need to have freedom to be creative and to be entrepreneurial. Where is that middle ground going to be in this country?
Anand Giridharadas: I think you have to specifically think about the case of the banks. We sometimes talk about this as if this was only a problem of like 300 coked out bankers on Wall Street. I think it was a kind of intellectual category error of understanding what banks are. Banks are a means to an end. They are lubricant of other people’s commerce. They’ve always been in the background wearing those grey suits, being conservative, helping other people take risks, make iPads, etc. At some point, we all got confused, not just bankers into thinking about banks as an end in themselves. In fact, the only real end in itself in the American economy, the most dynamic thing that every smart undergraduate wanted to do. When banks step out front and become the star, it’s a very dangerous thing. But I don’t think we’ve learned that lesson fully.
Daniel Altman: Hold on a second. We have to stop calling them banks because financial institutions are also insurance companies, hedge funds; we have a whole bunch of different animals out there right now. And the problem is that we don’t even know what they’re doing. Forget regulation, we don’t even have the monitoring. We can’t even see it.
Anand Giridharadas: Well, we don’t even have a name actually, as you pointed out. We don’t have a name that actually… a single word that captures what all these different institutions are.
Daniel Altman: But we’ll never see a crisis coming if we can’t see what’s actually going on in this industry.
Dambisa Moyo: Once again, regulation has to come from policymakers. They are responsible for all of us for the taxpayers, for individuals, for the bankers. And the fact of the matter is that bankers, by and large, not all of them, but are driven by profit making, they’re just an institution like everyone else, so all other corporations are driven to make profits and to the extent that the government provides a policy environment for them to do that, they will pursue that.
Parag Khanna: Well, regulators too have been guilty of two things, not only are they… have they been asleep at the switch, so to speak, not paying attention to all of the things that banks were doing. But they also don’t necessarily have the technical competence to understand it, which is why when you mentioned regulation earlier; don’t you think that actually the financial industry needs to have some self-monitoring mechanisms in a way because only they can actually know what they are doing?
Daniel Altman: Well, there are ways we are looking now in the financial sector to help banks to assess what their risks would be based on the risks of other banks. And that’s a step in the right direction too. But we’ll never really close the circle until we have global monitoring because all of the financial markets are global right now. And if we only have regulation or monitoring in a few traditional centers, then all of the activity that we are trying to stop, the herd behavior and the exotic trades will just move offshore and we need to be very conscious that that’s a risk for our markets too.
Anand Giridharadas: And I want to disagree slightly with Dambisa because I think to say that it is one party’s job, the bankers in this case, to try and make as much money as they can and the government’s job to kind of rein them in and that’s it, I think is not quite right. I think we all have some amount of all of the responsibility. We think about medicine. Doctors are also profit maximizing. But in that profession it is much more internalized that you’re trying to maximize profit and not trying to give the medicine that kills, but is a kind of balance between a number of different obligations; your obligation to the patient, to society, to public health and to make money. And I think that every profession actually has a range of variables that you need to satisfy. And I think we need to get into the financial industry’s head, that there’s actually multiple things they’re optimizing just like doctors, journalists, anybody else.
Dambisa Moyo: Well, I’d love to know what it was, what else are they optimizing?
Daniel Altman: Yeah, well what do we do, for example about Magnetar, this big fund that made the sub prime crisis worse basically, in a way that was totally legal and resulted in huge gains for them, but a huge loss for the economy as a whole. Should that be illegal?
Anand Giridharadas: I thinking it about it like medicine is just right. There’s a million situations in which a doctor can reduce someone’s life chances, but give them a profitable medicine and a profitable treatment. Some doctors do it. But in general, it’s internalizing that profession, you don’t do that. How do we convince doctors not to profit maximize that situation? I don’t know. It’s a whole series of education, maybe it’s the oath, maybe it’s a culturization. But I just think we need to think about… we actually get this right in a number of professions. Airplane pilots when they’re up there are not trying to optimize for getting the biggest raise in deciding how to land. There’s a kind of ethic on the best landing, the safest landing.
Daniel Altman: They’re pretty aligned with the passengers in terms of their…
Anand Giridharadas: Fair enough. But I’m just saying there are a number of professions in which we get this right, in which we don’t get people to very narrowly think about one variable. So I don’t think we can take it for granted that in this industry people are incapable of optimizing intangible as well as tangible ****…
Dambisa Moyo: No, I think that’s absolutely right, but the fact of the matter is, it’s really is the essence of the capitalistic system to have the profit maximizing as a goal. And you’re right, that in certain professions, there might something that supersedes that. Politics is a classic example of that. You have politicians in capitalist societies, but I wouldn’t say their utility functions is entirely driven by money, it’s driven by power, which is quite different. But all I am saying is that, we pay executives, corporations, and banks based on performance and that’s really what they’re driving to achieve. I mean, it’s not… there’s no interest for them to have these institutions blow up, but at the same time, they do look for guidance in regulators and policymakers in order to define what the framework is and where they work.
Daniel Altman: But we need to pay for long term performance. When we start paying them for short term, that’s when we run into problems.
Dambisa Moyo: Absolutely, it’s the same with politics. [00:54:49.09]
Question: We’re **** stretch Anand’s analogy, we’re all in the same economic jumbo jet and it’s a long haul flight. Well thanks very much for your insights. More on this and other very pertinent topics related to the future of the global economy at BigThink.com.
