The public and the politicians have been outraged at the bonuses the recently bailed out banks have decided to pay themselves. In the United States, bankers are now held in lower esteem than politicians. Unfortunately the public’s anger is misplaced. Yes the bankers are greedy but after all why else would anyone put up with the long hours and grueling machismo that a job on Wall Street entails? As Adam Smith taught us in 1776 in his Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love…” If the system works, greed is good.
Unfortunately, our monetary system – including its domestic and international components — is broken. It has been providing excess money supply and credit growth on a global basis which has promoted one bubble after the other and which has encouraged bankers and everyone else to take excessive risks. A surfeit of liquidity and debt combined with financial deregulation reeking of moral hazard. What a system! When the bankers are right they keep their rewards. The government absorbs the losses when they are wrong. You can’t blame the bankers for picking the ripe fruit from the trees that the politicians have planted.
The system didn’t get broken in one day. The next section is a brief review of some financial history. It’s taken just short of one hundred years to get to the broken system we have today. That’s the trouble. The prophets of doom have always been too early, too impatient. Change takes time; the black swan doesn’t fly every day. Most of the time, the optimists are right.
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