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Submitted by Ukachukwu on
Anonymous, you really hit the nail on its head. I think the issue is not whether compensation contributed and everyone was carried along with the market; but Why the financial sector that caused all the problems did not get a fair share of the losses that they inflicted on everyone. It has been reported that the financial sector workers make up the highest earning in the US and UK (and I think about every other place) in recent times. one thing humans may not like is unfairness and very high income inequality and where most of these high earners (e.g. some of the culprits in the crisis) are earning so much and seemingly contributing little to the real economy. Financial services firms seemed to be paying so much to employees and with this crisis, one wonders whether they were really contributing so much to real economic growth and well-being to match their wages (http://www.economist.com/node/21543178). As stated in Economist article "Mr Kaplan and Joshua Rauh of Northwestern University note that investment bankers, corporate lawyers, hedge-fund and private-equity managers have displaced corporate executives at the top of the income ladder. In 2009 the richest 25 hedge-fund investors earned more than $25 billion, roughly six times as much as all the chief executives of companies in the S&P 500 stock index combined...But the relatively large role of the financial sector in English-speaking countries could also be a factor: even more of the top 1% work in finance in Britain than in America". As Demirguc-kunt and Serven (2010:94) stated "it is the duty of regulators to identify and remedy gaps in information well in advance, and recognize the gradual reduction in transparency that comes with financial engineering and regulatory arbitrage and to nip it in the bud by demanding improvements". This suggests that some financial engineering may not be economically useful and pose great risks to the economic system. So why encourage more of financial engineering for products we do not even understand, maybe under the faith that the markets cannot be wrong in their valuation and the rating agencies cannot be wrong. If the markets are right and the financial models are built on sound economic theories, why worry? But the key issue remains: WHY WERE THE FINANCIAL SECTOR ACTORS, FROM CEOS TO OTHERS, NOT MADE TO PAY A FAIR SHARE OF THE FALL-OUT FROM THEIR ACTIVITIES? I hope going forward, we will not keep assuming that the market is ALWAYS RIGHT and that all kinds of financial instruments from financial engineering always reduce systemic risk and are better for the real economy. Moreover, we may need to encourage talented people to go into more economically productive activities that we understand well enough instead of the esoteric financial engineering activities that they carry out in financial firms. we are watching