Friday, February 22, 2013

Geithner Doctrine worked as financial crisis just a 'blip' for bankers

Under the leadership of the US Treasury and Federal Reserve, prior to the current financial crisis global financial regulators abandon the policy of financial failure prevention that the global financial system is based on in favor of the policy of financial failure containment.

The policy of financial failure containment is embodies in its corollary, the Geithner Doctrine.  Under the Geithner Doctrine, as Yves Smith says, no action shall be taken that hurts the profitability or reputation of a bank that is too big to fail or politically connected.

Under the policy of financial failure containment and the Geithner Doctrine, at the beginning of financial crisis most western economies adopted the Japanese Model for handling a bank solvency led financial crisis.

Under the Japanese Model, bank book capital levels and banker bonuses were protected at all costs.

The Financial Times reports that it is mission accomplished when it comes to having protected banker bonuses.

At the same time, the cost to the global economy has been significant and is still rising.

As regular readers know, there is an alternative to the policy of financial failure containment, the Geithner Doctrine and the Japanese Model.  The alternative is the policy of financial failure prevention and the Swedish Model.

Under the Swedish Model, banks are required to recognize upfront the losses on the excess debt in the financial system.  By having the banks recognize these losses, the real economy is protected as it does not have to divert capital needed for reinvestment and growth to debt service.

Of course, under the Swedish Model, banker cash bonuses are limited until such time as the bank has rebuilt its book capital level through retain earnings.
The financial crisis has been “little more than a blip” for London bankers who were being paid more three years after it hit than before and were more likely to be employed than other workers, a report has found. 
The financial sector has proved remarkably resilient with wages in the City rising, while other workers saw pay fall between 2008 and 2011, according to research from the London School of Economics. 
Inequality before the crisis was driven by high pay in the financial sector and does not look set to stop, said Brian Bell of the Centre for Economic Performance, a co-author of the report. 
“The sector which in some sense caused the whole crisis is the sector which seems immune to almost any employment effect,” said Mr Bell. “Traders earning millions are in some sense not replaceable . . . so they have remarkable bargaining power within firms.”
Actually, requiring banks to provide ultra transparency and disclose their current global asset, liability and off-balance sheet exposure details would go a long ways to reducing the leverage of the traders.

Exposing their positions to other market participants would dramatically shrink the profitability of their bets as market participants trading against the bank would limit the upside of the bank's positions and maximize the downside.

With profits lowered and risk raised, banks would reduce the size, if not completely eliminate, the bets taken by traders.  The result is much less compensation for bank traders.
London’s finance workers took home 14.2 per cent more in salary and cash bonuses for 2011 than they did in 2008, compared with a 3.7 per cent rise – a real terms fall – for all other workers.
The top 10 per cent of bankers saw their wages rise by an average 8.6 per cent over the three years, more than the 2.3 per cent rise for the top decile of all workers. 
The report shows that a worker in the finance industry was still 2.2 per cent more likely to be employed than workers in other sectors....
Bottom line:  the policy of financial failure containment, the Geithner Doctrine and the Japanese Model have been wonderful for protecting banker pay.

And what does the real economy and the rest of society have to show for it?

Adoption of austerity policies and a rewriting of the social contract.
Two Labour MPs said the report showed that the financial sector – much of which was bailed out by the state – had not changed its ways. 
Lisa Nandy, MP for Wigan, said it was “business as usual” for parts of the banking industry and the government should “not be letting them get away with it”. 
“It demonstrates that finance executives and investment bankers have learnt nothing from the financial crisis,” she said. 
Paul Flynn, Labour MP for Newport East, said banks were part of a “dependency culture”. “It proves that the wages of sin are handsome,” he said.
Of course, this was the goal of the policy of financial failure containment, the Geithner Doctrine and the Japanese Model for handling a bank solvency led financial crisis.

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