Nassim Taleb solution: “ban bonuses for bankers”

My grandfather was born December 31, 1899.  He was in his 20’s and 30’s during the credit boom of the 20’s and resulting Depression of the 30’s when he worked as a streetcar driver in Detroit.  I was lucky enough to grow up next-door to my grandparents who were Canadian farmers by the time I came along.  My grandpa died when I was 19.  All my life I remember him hating debt, shaking his head and saying in disgust, “God damn bankers”.  When I was a kid Glass Steagall had stuffed the credit genie back into the bottle and bankers had been tamed back to boring, conservative, salaried types.  Grandpa’s aversion seemed a little curious and harsh to me then. 

My son was born on December 18, 1999 (1oo years after his great-grandfather).  Today as I was driving him to the bus, a story about Italy’s debt crisis came on the radio.  Before I could say a word, my son shook his head in disgust and said “bloody bankers”. 

And that folks is progress: our generational learning curve has come full circle once more.  Now there is hope for the next 100 years.

Nassim Nicholas Taleb, a professor of risk engineering at New York University Polytechnic Institute, is the author of “The Black Swan: The Impact of the Highly Improbable.” He is a hedge fund investor and a former Wall Street trader.  He offers a simple, workable solution to reckless risk taking in the banking sector:

“Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed should not get a bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also some insurance companies and even huge hedge funds — should be strictly regulated.

Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.

… Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill, than bankers.”

Read the whole article:  End Bonuses for Bankers

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3 Responses to Nassim Taleb solution: “ban bonuses for bankers”

  1. Jack from Surrey says:

    One of my dear friends, an 85 year old woman my children call grandma, comes over on a regular basis to chat world economics and politics. A term she frequently uses is “Glass Steagall”….yet, you rarely hear this mentioned in the media.

  2. Robert says:

    Taleb says, “Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed should not get a bonus, ever.” What kind of “company” is it that would require “a taxpayer-financed bailout if it failed”? Taleb is speaking nonsense. There are no special kinds of companies that should get government bailouts.

    Imagine if geniuses like Obama, McCain, Read, Pelosi, etc. were allowed to set wage rates. What’s next? Nixon imposed Price Controls in 1971. Mugabe imposed Price Controls in 2007. Governments have a less than stellar record in directing the economy.

  3. dave says:

    Sounds like your son is one smart little guy!

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