Finance Has Lost Sight of Its Role

Why are we in the mess we are in? There are lots of proximate causes: overleverage, global imbalances, bad financial technology that lead to widespread underestimation of risk. Readers can no doubt improve on that list.

But these still are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease.

I will confess to not having addressed this particular line of thought directly, even thought it has crossed my mind plenty of times. Many readers have noted, and I agree completely, that the financial sector has become too large relative to the real economy. But many commentators, your humble blogger included, have failed to probe deeply how such a distorted economy came to be seen as a good policy outcome.

In 1980, financial firms accounted for 8% of S&P earnings. During the peak of our last stock market cycle, their profits were over 40% of the total.

Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do (aside: I had a lawyer from an entrepreneurial family who was refreshingly aware of that issue, and would write off hours before sending bills to clients, recognizing that the amount of time her firm had spent on certain matters simply wasn’t worth it from an economic standpoint to the client). It is ironic that free market fundamentalists have so vociferously argued for unfettered markets, without understanding (or perhaps understanding all too well) that the house always wins.

When I was a kid and had my first serious jobs on Wall Street, there was no explicit formulation of that conundrum, but the firms understood their place. You could make a very very nice living on Wall Street. The barriers to entry were high enough to allow for oligopoly pricing, but that meant for rich pay packages rather than an easy life. You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have numerous bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The time pressure is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. One buddy stepped into his shower fully clothed.

And exhaustion and loss of personal boundaries is an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their world view might not be the center of the universe, and why they might not be deserving of their outsized pay.

But I digress. There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system HAS to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated. Yet rather than trying to figure out what a new, slimmed down version of banking ought to look like, to ascertain which pieces should be preserved and which jettisoned, the authorities are instead reacting in a completely ad hoc fashion, rushing to put out the latest fire. And in the process, they keep trying to validate overly inflated asset values (a measure straight out of the failed Japan playbook) rather than try to ascertain what their real value might be so as to determine how much recapitalization might ultimately be needed (if you doubt me, Exhibit One is the pending Citi bailout, in which lousy assets will be guaranteed at phony values). Is this denial? Do the authorities fear that if they work up this analysis, it will leak out and the markets will panic? This seems to be the first, most important order of business, yet here we are more than a year into the crisis, still tip-toeing around one of the very biggest issues.

And why is that? Back to the cult issue. Willem Buiter has chastised the Fed for what he calls “cognitive regulatory capture,” that is, that they identify far too strongly with the values and world view of their charges. But it isn’t just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes. Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued? A GM bankruptcy would be at least as catastrophic as a Citi failure. but GM elicits attacks for the incompetence of its management and the supposedly unreasonable posture of the UAW (the same free market advocates recoil at a deal struck by consenting adults). The particular target for ire is the autoworker pensions and health plans, as well as their work rules. But the pension plans being underwater is the fault of GM management for not providing for them in the fat years; I personally have trouble with the idea that health care should vary by class; and for the work rules, German and Swedish automakers have strong unions and yet can compete. I see the UAW as having correctly seen GM management feeding at the trough and doing a good job at extracting their share.

And yet the specter of incompetent, and worse, DISHONEST management elicits far less anger. GM may not make the best cars, but Citi and other banks sold products that were terrible, destructive, that resulted in huge losses and are wrecking economies, damage crappy cars could never inflict (environmentalists might quibble, but never has so much seeming wealth evaporated in so little time, and with the main culprits readily identified). They paid huge bonuses, yet their 2004-mid 2007 earnings have been wiped out by subsequent losses. But while UAW workers will have to give up on deals cut earlier, in terms of health care and pension promises (entered into, by the way, to bridge difference over wage levels), I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days.

I don’t know how to convey a sense of how deeply indoctrinated we all have been. This Independent story may give a sense of how banks have completely lost sense of their place.:

High-street banks are continuing to hit businesses with punitive interest rates for loans and overdrafts and are resorting to more severe measures to ensure they are paid.

Some are demanding that owners of small businesses put up personal assets as collateral in return for a business loan. Others are changing conditions of loans by sending emails rather than meeting in person, and giving borrowers just 48 hours to comply with unilaterally-rearranged overdraft and lending agreements.

The Business Secretary, Lord Mandelson, said he was alarmed by the banks’ behaviour: “That is not the sort of constructive relationship that is sustainable between banks and businesses…

Paul Cox, from Surrey, was also asked for his personal property to be put up as collateral against a business loan by the Royal Bank of Scotland just last month – despite an excellent record with the bank. “I’m fortunate – I could walk away,” said Mr Cox. “Others have to accept punitive terms.” RBS received the biggest slice of the Government’s bailout deal – up to £20bn.

The Federation of Small Businesses (FSB) said that when some members approached banks to discuss loan agreements, their accounts were reissued under harsher lending terms.

Chief executives of Britain’s big banks, who have been regularly meeting with the Government and small business groups, have all made positive noises about ensuring viable small businesses have the access to finance that they need. But branch managers are often reluctant to return to relaxed lending policies which may put their branches in a perilous position.

There are several issues conflated in this story that need to be picked apart. One is that there were a lot of loan made in the frothy years that were not sound. Some people who had access to a lot of credit will correctly have a lot less, and that on dearer terms. But there are also perfectly worthwhile businesses and individuals who are also caught in the meat grinder of indiscriminate reduction of loan balances. And because government support has been extended with the explicit understanding that banks would make loans, the punitive treatment of high quality borrowers is indefensible.

But those are not my main focus. What stuck we was the subtext of the piece: times are bad, and any efforts to extract more revenues from customers, even if it is blood from a turnip, or worse, even if it puts a viable business under, is warranted. The idea that the needs of the financial sector can trump those of the productive sector are dangerous and destructive to our collective well being, and need to be combatted frontally.

Print Friendly, PDF & Email


  1. Anonymous

    Thanks for putting so well something so many of us are thinking and haven’t quite found a way to express.

  2. ndk

    Finance will always have an outsized impact on the real economy and the lives of us peons running around in it. It’s our collective circulation system. Money decides to some extent who lives well, and who doesn’t, and the financial system has a lot of control over where money gets allocated. This is just the nature of banking, and from the Medicis to today, it’s been a position of enormous power and prestige. It ebbs and flows, and it’s worse now than it ever got before, but I don’t see it vanishing at any point now or in the future.

    However, I think you underestimate the amount of anger on the streets. You describe whence your point of view comes, so I can see why you don’t encounter much anger. I live in fly-over country, and there’s severe rage at the coasts, NYC, and Washington for their original excess and the rescues they now require. People are livid. This is now being complemented with a healthy degree of fear, though far less than there should be, as grave as the situation is. The comments on many blogs, including yours, are incendiary and getting more so by the day.

    The bubbles of the last 25 years, with the mild exception of ethanol and farming for a good year or two, passed us by completely. As a result, there was never much of a focus on wealth by the people who stayed here. Family and a good life come first. You don’t screw people, and you don’t lie, and there are consequences for both. That’s great, but now we will suffer the consequences of actions that never benefited us. People understand this. I read a lot of great ideas for reform online every day.

    The embedded power structure — media, the players themselves, and the regulators — is where we have the complete lack of creativity and perspective. I hear no deep analysis, no introspection, no planning, nothing. This is not being treated as the sea change it is. I’m certain there are some in the Fed, Treasury, and banks that do realize the bell tolls for them this time. Most just want to suck a little more blood.

    You live in that nexus, Yves, and you’ve lived outside it in a hundred ways. You can tell us better than we can tell you. Is there any way the FIRE industry will step aside and find religion?

    I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days.

    It depresses me to no end to see you write that, Yves.

    p.s. Since we’re waxing personal, I’m a Colorado native from the prairie. I always dreamed of living up in the mountains in one of the small resorts I visited as a kid. The false prosperity of the coasts bought up and mutated those little glades of heaven in our mountains before I could get there, though, and I don’t think they’re ever going to leave. Though I’m a leading researcher in my own field, not much money passes by, and I don’t think I’ll ever be able to get up there.

  3. thomas j

    There was widespread objection to a bailout of TARP by the general public. The amount of objection in terms of calls into Congressmen and Senators opposing the proposed bailout of the auto companies is not even close to the opposition against the TARP.

    It’s just that the bankers control the media and the politicians so that these views were not adequately aired in the MSM. The media reported the TARP as being absolutely necessary to avoid financial calamity whereas the media focused on the auto execs flying in on corporate jets.

    I don’t remember anyone complaining when bank presidents flew in on their corporate jets to testify before Congress.

  4. Anonymous

    The production of goods is supposed to be the basis of the economy. Finance is supposed to be only a sort of dessert….but we have made a meal out of dessert. When you live on a diet of chocolate eclairs, as we have, it is no surprise that it makes you sick.

  5. satan

    I have a feeling that we are going to be putting bankers and their kids in incinerators within less than two years.

  6. bg

    In a long debate with a VC over the weekend, we both agreed that had we been the foxes left in charge of the hen houses we likely would have behaved similarly. The indoctrination you refer to was due to two factors: 2 decades of increasing asset values and oligopoly behavior in business and finance (all become close followers).

    Imagine having complete knowledge of the future crisis in 2006, and actual responsibility for a major financial firm. How would you steer this ship differently? The only model I can see is the Goldman model where the executive team actually took out large secret bets against their own traders.

    If periods of prosperity and oligopoly are a natural stage of finance, than we have to accept bubbles, panics and deflation as equally unaviodable. I can imagine a perfectly good regulatory regime to avoid this cycle. However I cannot picture this regime surviving a period of prosperity and oligopoly.

    But the ashes will make the soil richer.

  7. ndk

    In a long debate with a VC over the weekend, we both agreed that had we been the foxes left in charge of the hen houses we likely would have behaved similarly.

    That disgusts me, and I view VC as fundamentally broken too. Your industry is not profitable nor helpful. I’ve had to work with VC-backed competitors for years. They had no accountability, no business model, no financial constraints, and no clue. And yet, they’re richly rewarded on their way to failure, and they ruin more fit competitors with less financial resources.

    Please extend the introspection to yourselves.

  8. bg


    I am not in the financial industry, nor ever have been. I meant the comment as rhetoric to inspire others to regard these selfish actors as actors in a larger play.

  9. PeakVT

    Good rant, though I disagree with this:

    Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy

    I wouldn’t call it a tax. Finance adds value by acting as an intermediary in various ways, thus connecting capital and investments in ways that wouldn’t happen otherwise. But what has happened is that finance has become WILDLY overcompensated compared to value it adds because it controls of the flows of money. The over-compensation IS a tax. And the specialists haven’t bothered with sober reviews much lately. The over-concentration of finance in New York and London has added to the problem by allowing finance to withdraw into its own self-referential world.

    Kevin Phillips has been talking about late capitalism and the financialization of everything (think GM and GMAC) for a while. Reading at least one of his books is worthwhile.

  10. ndk

    I am not in the financial industry, nor ever have been.

    Sorry for the frustration vented your way, bg — it was aimed at VC in general, and I thought you were implicated. The damage inflicted to the real economy by our broken financing is extremely pervasive, and you’re right, transcendent of any specific market or funding model.

    The financiers don’t realize it, either. It’s quite likely the VC would never even consider the claim that he and his industry are doing more harm than good.

  11. Anonymous

    I enjoyed this enormously. Good job!
    As for hard work, well you might compare your banker friends to a medical intern. I
    seriously don’t think you’re under the same kind of pressure. Many fields undergo trial by fire work-loads.

    You need a TV program. I promise I’ll watch.

  12. Yves Smith

    I am deliberately taking an extreme position on the value of the finance function precisely because it is so seldom questioned in our society.

    The Japanese see the financial function as a frictional cost on the productive elements of society, and banks being highly profitable is not seen as a good thing.

  13. Anonymous

    Yves: The economy is suppose to go into depression, not you.

    I think there is something you’re not telling us whether it’s what you are reading or being told.

    Things are just warming up, it gonna get a lot worse. This unveiling only began about 1 year and 3 months ago.

  14. Anonymous

    Thanks for posting the best article I’ve seen since the beginning of the crisis on the destructive role the financial sector continues to play today.

  15. m donner

    well, it started when we creatures had to choose between accomodating to nature or trying to control it. hence, the whale and perhaps dolphin and man…crawled upon the shore, developed hands with fingers and began the task of shaping the natural world for our own purposes.

    but really, greed and self interest and an uncontrolled mind….a mind that does not serve our inner being rather runs our lives, creates seperation from others and makes us think we are special. special because…fill in the blank…and hence those who are not…ie slaves, blacks, others who are ‘created’ to work for us more deserving…
    and the systems flow from there.
    i was in grant park in chicago in 1968, tasted tear gas, could recognize bill ayers then…after that the ruling folks decided wow, pretty close to the edge here..better get a handle on this shit or we are gonna have socialism in good ole USA. so the great cooption began. and here we are…commercialism rules the day, hence money, fear of jobs lost, health care lost and playing the roles.
    but notice the trend line..the rich have gotten richer, in N. america and well as the world. the media was purchased, the gov was taken over by the revolving door and the greed got so much that they almost are eating themselves.
    more plainly, the plan was to off load dirty manufacturing and such to the ‘other world’ and become a clean society of white collar workers and management.
    bigger still was the realization that financial institutions created the opportunity to move capital up the pyramid fast(read theft or manipulation as you prefer). so much easier to take the money when you are the banker, the broker the insurance company..who own the media too of course…so much easier to manipulate and game the system then trying to eek out a con in some manufacturing industry..with given cost, obvious products that come and go and are counted.
    look at the example of (was it GS or MS or..) who marketed the bonds for california..then sent in from a differnt division of same company the insurance folks who said..those bonds are insurance against their badness..then the broker who followed to offer to trade the peices of insurance.
    muliply that process world wide and make sure the dollar is king and the currency of exchange (might need a few nukes just in case..or fear better still).

    can’t you see how this system can be gamed better then any before it?
    and bingo, here we are today…
    kinda like debt and slaves while they load it on us into the future.

    not really a conspircy, more like natural extension of ….what, forgetting we are all one people and we are even nature itself.
    and back to nature we might well end up…planting seeds and carrying water…if we are lucky i guess. full circle; big picture stuff here.

  16. Yves Smith

    Anon of 12:48 AM,

    Thanks for the vote of confidence re TV. Various people have been trying to get me on TV in a serious way since 1999, and it never gelled (some of it was timing: no one wanted skeptical commentary in the dot com bubble, and when it burst, there was no money for new programming).

    As for pressure. I actually do have to beg to differ, I know residents put in brutal hours, but one of the distinguishing features of the Wall Street sweat shop is the extraordinary time pressure, as in multiple intra-day deadlines that change as the day goes on. You are expected to get a ton done, for multiple masters, in response to changing market conditions and clients priorities. I don’t know what it is like today, but I had 30+ clients. On each client, there were at least 2 people who could ask me to do stuff, plus clients would sometimes call directly if they couldn’t reach the senior guy right away. That meant I had 100 people who could give me work, and they didn’t care what the other 99 wanted me to do.

    Waitressing, particularly short order waitressing, is consistently found to be one of the highest stress jobs because of the constant demands and lack of control. Now add that the job is error-intolerant. Errors, even seemingly trivial mistakes in client communictions are career limiting events.

    I am not saying that these guys deserve sympathy, they are hugely well paid, but I am trying to get you to appreciate why they think they deserve it. The work is actually quite miserable until you get to be very senior.

  17. IF

    This is similar to an observation that Warren Buffett made a few years ago: Certain industries should not be making so much money. I would like to thank you for spelling out your thoughts so clearly.

    The soviet union had its frictional cost in the defense and space industries. The US has banks (and defense). I am currently on a visit to Switzerland. A whole nation can live very well by milking foreigners. But a nation cheating themselves?

  18. michael m.

    I am adding my praise to that of others. In particularly, you are right to focus on the problem of the underlying psychology that has led to the financial world achieving such an entitled position, and being allowed to get away with so much compared to others. That so many in the educated classes seem to go along with this, as you point out, looks like a symptom of something very bad in our time: what could it be?
    Something has gone deeply wrong.

  19. Anonymous

    A good article in the link below on how JPM Chase is increasing the minimum payment to 5% and adding a $10 per month charge to anyone who has held a balance for over 2 years.


  20. Anonymous

    German and Swedish automakers have strong unions and yet can compete

    Surely you don’t mean Volvo or Saab, which were so non-competitive that they were aquired by Ford and GM respectively.

  21. satan

    People abuse the system till someone else kills them- human history. I suspect that lots of educated people are going to find that out.. the hard way.

    Hubris ends in death..

    //I am adding my praise to that of others. In particularly, you are right to focus on the problem of the underlying psychology that has led to the financial world achieving such an entitled position, and being allowed to get away with so much compared to others. That so many in the educated classes seem to go along with this, as you point out, looks like a symptom of something very bad in our time: what could it be?
    Something has gone deeply wrong.//

  22. Independent Accountant

    In 1980 I could see there was overinvestment in the oil patch. Why? Oil's percentage of the S&P 500 value was 33% It had been 6% in 1975. Similarly, finance recently reached about 30%. Way too high. Paraphrasing Winston Churchill, "Never have so few, been paid so much, for doing so little". Current conditions are unsustainable. Further, you have my "Harvard MBA Indicator". Very negative for the finance business.

  23. Anonymous

    Yves: I believe you when you write that people in investment banking work long hours under unending duress. But here’s my response: your description applies to every journalist I know, every teacher I know, every checker at Costco—basically, you are describing how ever-higher productivity became the way by which an employee’s value to an institution is measured. This has increasingly struck me as a false way to assess someone’s value not only to an employer but to the surrounding community at large. In order to increase quarterly profits and meet the next target, workers of all stripes have come to be regarded as chattel–nothing more, nothing less. Until this paradigm is finally rejected, I hold out little hope that conditions will improve for those who, unlike most investment bankers I know who have socked away millions, still have to work for a living. Funny thing is they want to work as it brings them not only an income but a sense of purpose. Maybe a swelling number of those in finance would do well now to go forth and be “among the people.”

  24. Francois

    “That so many in the educated classes seem to go along with this, as you point out, looks like a symptom of something very bad in our time: what could it be?”

    Couple of thoughts: As Yves pointed out, the difference in treatment between the automakers and the banks is rather startling. Why is that?

    At a very primal level, there is a snotty attitude toward those who make stuff in this country. As a high school student, you are told that college (a.k.a. the 4 year one) is the way to go. Technical college are seen as a career choice for those who can’t make it where it matters. Never mind that a kid might enjoy technical matters immensely, that is just not, hmmm, *worthy* of true self-respect. The message seems to be that if you fix material things, you are not really using your brain, but mostly your hands.

    Let’s contrast this attitude with the one we harbor toward money. It’s a cult: Whomever is the disciple from the Tribe Who Master Money (bankers, traders etc.) is implicitly seen as smarter than the rest of us. So, if smart AND successful, (making a lot of money moving money) I mean, come on, how can this individual be wrong?

    There is, of course, much more to be said about the whole matter (how about a book Yves? :-D ) but unquestioned attitudes and prejudices may start explaining what’s wrong with the picture so aptly described in Yves’s post.

  25. Mike Reitsma

    I’m reminded of the ad a couple years ago in which the chimps riddle the behind of the diligent young presenter with laser pointers each time he turns his back, and in the next scene he is shown addressing their proposal to spend the corporate resources on lotto tickets.

  26. jm

    A truly apt description of the situation, Yves.

    Through the and real estate bubbles, the financial fraud that enabled them, and the machinations that accompanied them, truly vast sums have siphoned out of the public’s retirement savings into the pockets of the financiers and corporate management. And it seems not only that there’s no way to get the money back, but that even more is going to be taken from the public through taxes and sent to follow it.

    My only quibble with Yves’ post is that it’s not true that Citi’s defective financial products won’t kill people. A great many people are going to die before their time due to the side effects of this. Some will commit suicide after financial ruination. Others will die due to not being able to afford proper medical care after losing their jobs and health insurance.

  27. Richard Rumelt, UCLA

    A very interesting and perceptive piece. The excess size of the financial sector should diminish in line with the deleveraging of the consumer and the financial institutions themselves. In large measure, the government’s attempts to keep the lending going are counter-productive. We do not need, as a society, more financiers lending to more shopping centers so that consumers can buy, on credit, more big-screen TVs. As financial and personal debt is diminished, the government will have to borrow and channel that money into non-financial uses. I don’t like this massive increase in public indebtedness, but it is the only way to shift capital away from finance in the short-medium term.
    With regard to the bailouts, the big difference between GM and Citi is the political support in Washington and Michigan for the patterns of rent seeking. Morally and ethically, these union rates of pay are no different than, and are less than, the huge paychecks taken home by Wall Street executives. Both are simple rent-seeking, the conversion of corporate profit into private non-owner payments. The significant difference is varieties of political support for these payments. Both unions and fat-cats make significant political contributions, so we shall have to see.

  28. Yves Smith

    Anon of 1:43 AM,

    I clearly have not conveyed what it is like. One mistake, a typo in an important document, or an error in conveying deal information, is a career ending move. Yes, you won't be fired, but you will take a bonus hit and be tarred as unreliable. None of the powerful guys with good clients will want you on their deals. You have that, plus the constant reprioritizing (and everyone expects their work done, "no" or " I didn't have enough time" or "Joe X needed this before he got on the plane" is not an acceptable answer) and extreme hours in combination make this a different experience. M&A lawyers also have it this bad.

    It is not even remotely like being a checker at Costco. I've had scut work jobs, and the stress level isn't even remotely comparable. You are not simply working under extreme time pressure all the time, you are also working horrid hours all the time, except Christmas-New Years, maybe the end of August, and if the markets unexpectedly slow down a ton.

    And by long hours, I mean frequent all nighters (I once pulled two in a row) and no catching up. In at 9 AM, seldom home before 1 AM. 8-10 hours of work most weekends. You have no life. When I was at Goldman, all the married women were married to Goldman guys (except one who joined the firm married) because the only people you ever saw were people at Goldman.

    To give you another idea: I had a buddy, a moderately senior M&A type at another firm. She had to work all weekend as usual. People walked by her office and couldn't help noticing that she was lying on her side on the floor. She kept insisting she was OK. By Sunday night she was in sufficiently serious pain (and still at the office) that she called her boyfriend (also working the weekend at another firm) to come for her. He took her immediately to the emergency room.

    They cut her open, thinking it was appendicitis. She had diverticulitis, usually a disease of old people. They removed 3/4 of her colon and said if she had gotten there an hour later, she would have died.

    People at her firm made all sorts of noises for her to take the time to recuperate. She was back in a mere three weeks looking quite pale. Why? She had gotten sick in September, and was afraid that if she failed to come back soon, her bonus and standing in the firm would be at risk (ie, her accounts would be reassigned).

    To give you another idea, when I went to McKinsey, which is considered high pressure, I thought I had joined a country club, the pace was so relaxed, the hour requirements so much easier, and the control over work pace and content so much greater. And minor errors in client documents weren't even seen as a big deal as long as the analysis and the logic was sound.

  29. Anonymous

    Yves is right in that there is absolutely no doubt that IBs work harder than almost anyone else out there – and in a much more stressful and error-intolerant environment than almost anyone else (more than medicos, lawyers and air traffic controllers – who incidentally rotate on and off in regular scheduled periods to ensure they are always fresh and up to tasks – the consequences of error here are indeed great). Certainly an IB works much harder than a Costco worker or a teacher.

    But Yves story regarding the woman with diveticulitis is sobering. Why was she back at work three weeks later? Why do IBs work so very hard. It comes down to two simple factors (in varying proportion). The first is greed, plain and simple. The need to make more money than the next guy, and the use of wealth as a comparator / proxy for personal success. The second is more invidious. It is the sick, almost psychotic need that some (mostly very high-achieving) individuals have for continual affirmation, or even for rebuke when their best is not good enough. It’s almost a “daddy-fetish” (for want of a better description — believe me, I tried!), where those working can’t possibly afford to disappoint, no matter how unreasonable the expectation. It’s a bit like the kind of subservient subjugation that some unliberated women in third world countries experience at the hands of their husbands. And somehow it perpetuates itself in the male-dominated world of investment banking, with its sado-masochistic tendencies to overwork and personal punishment, it’s boom-boom-room antics and male bonding experiences, and its almost visceral hatred for women or anything that represents a sign of “weakness”.

    And yes, for the curious, I am male.

  30. freude bud

    I find the notion that law and defense are taxes on the economy just plain odd. (And that it goes by with nary a word, a pretty good indication of the indoctrination of which you speak.)

    Defense and law are only taxes if you believe that man is naturally good and that without government no one would hurt, deceive, or steal from someone else.

    In Somalia there is no defense or law, but it’s awful hard to do business there … or even to ship it by the place. This is one reason why it’s difficult to finance anything there, which, of course, makes everything that much more expensive to do. (It is also that reason why the Islamists are becoming more popular in that “country” and why the Sauds might consider propping them up, under certain circumstances.)

  31. Anonymous

    freude bud,

    I think you are hung up on semantics. Yves is talking about guns vs. butter. Countries can a fair degree of latitude in how much they spend on their defense apparatus. and the US is a very big spender here.

    And America is also a notably over-lawyered society. Given the parenthetical, it appears she meant the use of lawyers in a business context (as in they are necessary but nevertheless introduce frictional costs) versus in the justice system.

    I am old enough to recall that people used to do a lot more based on a handshake or a simple letter than they do now. And that IS a real cost. It is important that we acknowledge that the lack of trust and decay in business conduct IS leading to extra, unnecessary transaction costs. The idea may not have been articulated well, but I think the premise is valid.

  32. Thomas

    I just wanted to quote 2 lines from the article:

    “During the peak of our last stock market cycle, their profits were over 40% of the total.”


    “[Banks’] 2004-mid 2007 earnings have been wiped out by subsequent losses.” – i.e. over the longer term, bank sector earnings have actually been zero.

    Both statements obviously true, but contradictory. I suppose this paradox is the reason that it’s so difficult to regulate this industry. YS and others have pointed out that the recent egregious excesses wouldn’t have happened when the banks were private, and that now the employees do much better than the shareholders, but does anyone have a strong view on how regulation can make banks responsible again?

  33. Anonymous

    Can’t help but pipe up, with all this hard work/scar showing. It makes me chuckle to hear people that work in Air conditioned/soft carpet/soft-seat jobs, complain about long hours/work load and expectant bosses.

    I have worked 3 days with out sleep/lbs rucksack/w/fully loaded web gear and M16 w/203 grenade launcher on ops playing around in some ones back yard, spent a month in the jungle with half rations due to resupply snafu, crawl out, spend two days cleaning gear and drying out fungus/prickly heat all over body, jump on C-141 to Savannah GA and be rerouted to Alaska, have to switch from jungle gear to Arctic gear in fight and jump in to below 20F conditions for another month of training. Foot note 40% cold weather casualty’s moderate to severe. Thats just the fun stuff.

    My friends died doing their job so jerk offs can pull the kind of shit thats going on now in Wall st and DC. How do they feel over there now and when they come back to a system that has never looked after them for their sacrifice.

    I say bring back the draft make everyone pull their weight and see the world out side the comfort of their lavish life styles. I have blood on my hands that will never wash off and for what? So rats can bilk the blood out of others to massage their fragile egos?

    If I had a bull horn that I could put in all the ears of those that started this mess I would crank the volume up full and say “GET OVER YOUR SELFS” hell Cesar had his man behind him reminding him “you are but a man”.

    Am I incensed YES I am and until this country has a national mentality that goes beyond wealth and ignorance of what transpires in the ivory towers of politics and industry were screwed. We need to get pissed off and get them scared now. Sorry Yves just had to get it out of my system.

    Doc Holidays midget side kick

  34. fresno dan

    Agree, especially with the bizarre lack of outrage with regard to the people running these institutions. Again, did Hank Paulson know how GS made money? If he didn’t know that, how can he possibly be fit to be treasury secretary? And Robert Rubin – wasn’t his job at city “think big thoughts about risk”? Yeah, risky guy.
    My own humble view is that we simply gave up a governmental function (creation of currency) and let the shadow financial system create as mucy liquidity as it wanted (and since infinite leverage will generate infinite profits, that’s the road we were headed down…until of course reality).

  35. aw70


    THANK YOU for this piece. This should be printed as op-ed piece in every major newspaper across the country!


  36. Anonymous

    Firstly the independent article is misleading, but it does highlight a banking function which is failing. The big four banks in the UK have loaned more money to small business than they did last year. The government controlled banks ,Northern Rock, Bradford and Bingley and many foreign banks particularly US banks have significantly reduced their lending. Untill recently UK banks have struggled to compete against cheap securitized finance from the US through the likes of Northern Rock. In this respect it is perhaps a little unfair to charge UK banks as not lending.
    What this does highlight is that banks really no longer have the infrastructure to assess individual loans on a case by case basis. They group all builders and landlords together as facing severe problems from property devaluation, where individual firms may well be sound.
    As for investment bankers working long hours then quite clearly the banks are under staffed in this respect and are leaving themselves open to legal challenge. Its rather like saying bullying is ok because it has always been done.
    I would have a certain amount of sympathy with the main thrust of your article though that banking profits ought to be limited, so that the drag on the economy is minimised. The trouble is that many pensions rely on those profits along with many other things. Why not also examine the remunerations of upper echelons of business, especially non active directors or the legal profession who’s charges also extract their tax on the economy.Where do you stop with generals, actors and sports celebrities?

  37. GC

    ‘In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being.

    There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets.’ NYT

    This is gob smacking. I feel slightly less foolish for holding bank share during the period.

    Just goes to show that the regulators were asleep and the right wingers saying leave it to the market are nuts.

  38. Jojo

    @ndk said “However, I think you underestimate the amount of anger on the streets. …People are livid. This is now being complemented with a healthy degree of fear, though far less than there should be, as grave as the situation is. The comments on many blogs, including yours, are incendiary and getting more so by the day.

    Great post NDK (you also Yves)!

    I am seeing the same thing as you describe here in Calif., which is of course, not in fly-over country. Many middle to lower class people are very pissed off, no matter where they live. I here it at the health club, in stores and am seeing it on the blogs and forums I follow.

    Frustration is high and growing unemployment is going to make it worse. People out of work with time on their hands, no real job prospects, unable to stay in their homes or feed their families feel lost yet watch fat cat financial people screw everyone both on the way up and on the way down.

    There is a a lot of unrest and if the economy continues to worsen, I fear this may degenerate into class warfare. If I were wealthy, I’d consider staying in my neighborhood and if I had to go out of it, leave the Mercedes at home. Dress down and buy an old station wagon to drive.

  39. Jojo

    This is an apropos article from a few weeks back.
    NY Times
    November 3, 2008
    Less Finance May Be Just Fine

    Job cuts are the order of the day in finance — the business of money and promises. As painful as it may be, particularly in financial centers like New York and London, this shrinkage may mark a welcome reversal of a long-running trend.

    The financial expansion didn’t start with the booming housing markets of the early 2000s or even with the stock market bubble of the 1990s. Finance has been a growth industry for six decades. In 1947, the sector accounted for 2.3 percent of United States gross domestic product. By 2007, it had grown to 8.1 percent, and the increase has been remarkably steady.

    To listen to some politicians, finance may sound like a bad thing from top to bottom. That’s wrong. Finance is tremendously helpful. Banks, brokers and their colleagues collect money from those who have it and distribute to those who need it. This industry helps manage inventories, build factories and spread economic risks around so societies can afford to take on more of them.

    But finance helps the economy in much the same way the way a police force or an army helps keep the peace. Countries would be delighted to get the same order with fewer forces. They should be equally happy to get the same production and trade with less finance. Finance is a cost — not a benefit — of maintaining a complicated economy.

    Some police officers and soldiers think the glamour and danger that come with their jobs make them worthwhile. Some financial types, especially those at the top of the heap, are similarly enthusiastic. But how many of them really earn that generous keep by increasing economic efficiency?

    The answer probably can’t be calculated precisely, but any gains have to be set against three sorts of harm.

    Full article


  40. dyork

    Beautifully put! The finance sector must shrink, and we shall all be the better for it.

    But why are you singing solo? Where is the chorus? Why doesn’t everyone join in?

    That’s a question worth thinking about.

  41. Amnon Portugaly

    Thanks for an insightful article.
    No wonder, the FED, treasury and most economists are all from the same habitat, and form a monoculture of neo-liberal ideas.


  42. Nate Hagens

    Yves. I think you have voiced what for a financial person is close to a paradigm shift. I had a similar one about 6 years ago, when I ran a hedge fund and starting reading about resource depletion, limits to growth etc. (Incidentally, I started my finance career at Salomon Brothers, so I know of the slave labor/indoctrination of which you speak).

    This all gets back to ecology, both of natural systems and human behavior. We have finite resources. Period. Furthermore, and little discussed is the fact that our CHEAP portion of the finite resources are well, more finite. Financial assets are just markers for how the human economy extracts and transforms real capital into stuff, and where the profits go. Growth in earnings, and growth in the stock market is unequivocally NOT a natural law – it must be based on energy gain.

    If there is insufficient energy gain (as defined by (amount of natural resource output / amount of natural resource input) X the scale of the endeavor, then growth wanes, and eventually contracts. That is unless someone in charge of financial markers changes the rules. Since Bretton Woods, everyone has been indoctrinated into the ‘fiat’ system, not questioning what all these digital accounts represented (temporary markers for real capital: natural, built, social and human).

    Frank Rizzo said…
    Stop beating around the bush and name the real culprit: The Fed.

    The Fed is not the real culprit. The real culprit is humanity not collectively understanding thermodynamics and ecology to know that we needed to live of renewable flows instead of fossil interest. As the high coupon oil and gas interest turned more into a T-bill (directly via price, but indirectly via lower energy gain), people in finance did what was natural – lowered rates, lowered credit requirements, increased margin, lowered documentation, etc. all in an effort to get back the higher interest natural capital we had lost. Since all of these activities occured AFTER the peak in global energy gain, it stands to reason that the worlds fiat system is now even more bankrupt than it was 7 or 8 years ago before these measures started.

    The world itself is still rich beyond the wildest dreams of our ancestors. The average american uses over 60 barrel of oil equivalents of fossil fuels per year: each barrel has the equivalent of over 10,000 hours of human labor, which means we each have over 300 energy slaves invisibly standing behind us, not to mention all the other ecosystem services.

    None of this financial morass will be solved, until finance and the human economy is seen for what it really is, part of, (as opposed to above and outside of) a global ecosystem that still has a supply of (expensive) ancient sunlight, and a small supply of old sunlight (trees) and then just new sunlight in the form of wind, solar, hydro, wavepower, etc.

    Currency is a means of exchange from two parties that is based on trust. The item being exchanged need not have value in itself, but in order for it to be worth anything, people must acknowledge that what is behind it is based on biophysical principles, rather than someone just printing up money because it is needed.

    The Wall St I knew and that is now over was literally a fairy tale. It’s time to replace pixie dust with biophysical reality, roll up our sleeves, and start over. Not gonna be pretty, but the sooner we do it, the more natural resources we will have at our ‘disposal’.

  43. DownSouth

    Yves, thanks for this post. Being a part of the finance industry, all this must create some rather acute internal conflicts for you.

    I notice several commenters above have mentioned Kevin Phillips. Phillips writes in his recent book Bad Money that he has spent over 30 years studying the decline of other major empires–Rome, Spain, Holland and Great Britain. The point he makes is that, historically speaking, once a great empire has fallen to the point the United States has fallen, there is little chance for recovery. The economic problems transcend economics–they are rooted in a culture that has fallen into decadence.

    J.H. Elliot in Imperial Spain: 1469-1716 put it this way…

    “The Castile of Gonzalez de Cellorigo was thus a society in which both money and labour were misapplied; an unbalanced, top-heavy society, in which, according to Gonzalez, there were thirty parasites for every one man who did an honest day’s work; a society with a false sense of values, which mistook the shadow for substance, and substance for shadow…”

    “Gonzalez de Cellorigo was almost alone in appreciating that the fundamental problem lay not so much in heavy spending by Crown and uppr classes–since this spending itself created a valuable demand for goods and services–as in the disproportion between expenditure and investment. ‘Money is not true wealth,’ he wrote, and his concern was to increase the nationl wealth by increasing the nation’s productive capacity rather than its stock of precious metals. This could only be achieved by investing more money in agricultural and industrial development. At present, surplus wealth was being unproductively invested–‘dissiapated on thin air–on papers, contracts, censos, and letters of exchange, on cash, and silver, and gold–instead of being expended on things that yield profits and attract riches from outside to augment the riches within. And thus there is no money, gold, or silver in Spain because there is so much; and it is not rich, because of all its riches…’ “

  44. Anonymous

    I think there is a strong connection between the fact that much of what people sell depends on the purchase being financed. That is, people don’t pay cash to own, but they will make monthly payments (regardless of actually paying “more” this way).

    This is a huge part of our economy and accounts for FIRE being so large.

  45. Stephen

    Yves is once again correct….there is a value to banks connecting savers and users of capital BUT those transaction costs are friction and should be minimized.

    A banking sector that is TOO profitable is a bad thing.

    Other than the Ford CEO, ex boeing, can you name some prominent American who could run GM in place of Wagoner? B Schools dont produce for the Generals anymore (Gemeral Motors, General Mills, General Electric) but for Wall Street and Consulting Firms. The pay is outsized, not saying they dont work hard but when the financiaers make more money on a deal than the financed something is out of whack.

    There are lots of questions here, why didnt GM get whacked earlier, why is their capital continually provided to the airline industry for startups (a capital destroying industry if ever there was one). There are serious governance issues that allow individuals and companies to avoid the risk they purport to take.

    What is happening now is that thise risks are all being socialized, likely we dont have much of a choice at this moment.

    But, as the analogy goes, there will be a time to examine the incentives of the rivet makers back in Belfast, we are still fishing survivors and bodies out of the Atlantic.

    I dont know what the answer is right now. The system is too volatile to understand what is really happeneing, and each intervention affects the balance one way or another. Citi is broken, there will be changes there, GM and Chrysler are broken, same for them.

    I still wonder when the Yuan will be allowed to rise in value, since apparently this would be the normal mechanism to adjust. It might even help the Chinese since their population would get an increase in its standard of living, but higher unemployment (their fear)

    Great blog, great comments from so many. Can’t say enough good things about your blog Yves.

  46. Anonymous

    The financial tail has wagged the operational dog for far too long.

    I’m probably about your age Yves. During that time I’ve started or helped start four small manufacturing companies. Two are still going concerns and the other two were hard lessons about venture capitalists. The current company is all cash flow financed. The terms demanded by financiers are simply too high, we’ll stay small and hopefully grow slowly but the long term gain, if any, will be all ours. If we fail and lose I’ll take my bath without leeches thank you.

  47. lineup32

    The rise of consumption based economy creates the oversized finance sector as credit creation is the primary tool used to generate GDP growth via consumer consumption. The fact that we will see a shrinkage in leveraged credit creation which will move throughout the economy does mean a smaller finance sector along with it large layoff’s in other demand side employment such as advertising, graphic design,marketing, sales,and subsets.
    GDP growth based on expanded consumer consumption has peaked due to excess production,debt service,loan default to name a few.

  48. Anonymous

    After reading a pro and a con editorial concerning bailing Detroit in the local Sunday paper, I had the same thought that Detroit is taking the heat when there seems to be less directed at the IB’s. My thoughts lead to the opacity of the businesses. Even though it is much more complex than it appears, most people can understand the basic ideas of how much materials and labor affect the price of the automotive end product. If those are out of balance, you don’t have a good business model.

    I have a PhD in Electrical Engineering from a top engineering program. I work developing engineering simulation software, not rocket science, but it requires above the man-on-the-street knowledge of mathematics. I saw a number of my fellow EE graduate students recruited by Wall Street back in the mid 90’s to set up the program trading. Their pay was significantly higher than those who went to traditional engineering businesses. I wonder what some of those people are doing these days.

    Frankly, I have no understanding of how IB works – let alone how the service it provides is priced. How does one get a good anger on at something that looks like bookmaking and loan-sharking rolled into one. I don’t mind people rolling the dice, playing the slots, whatever – the jokers (both in and out of government) in charge of this have done it with my money, but without my consent.

    The hardest part to swallow in this whole fiasco is that there were rules in place that might have mitigated much of this, but those rules were relaxed and repealed over the years in the name of global competitiveness. If we don’t get new banking and financial regulations out of the new administration, their “Change” will just be a change of those in the largess class.

  49. MC in London

    I thought this was a great post although I too take issue with the notion that IBs work that much harder and under that much more pressure than others. Imagine working under that much pressure and for 1/100th or even 1/1000th the salary so you can’t mitigate the pressure by contracting out your laundry and by taking taxis home. There are lots of jobs that are like this – contract cleaners for example. And yes, their priorities are changed constantly and no they can’t refuse to clean toilet Y because they’ve already been screamed at for not cleaning toilet X quickly enough…Oh and by the way, they typically are on contracts, can be fired overnight, have to pay for their own cleaning materials…See Polly Toynbee’s Hard Work: Life in Low-pay Britain.

    But other than that, seriously great post.

  50. miguel_swanstein

    Yves, thank you for such a great post. The content of this blog is one of the highest on the web.

    I can verify the nature of your IB apprenticeship. I’ve had a few friends go through the process and they report similar experiences. They’ve gone on to healthier endeavors, but I often wonder about what types of personalities “rise” to the top of such a system. It’s clear that it doesn’t produce better decision-makers (the overreaction to minor errors have less to do with risk management than indulging sadistic streaks, apparently) and may actually give rise to malevolent institutions.

    One reason I’m quietly cheering the fall of Wall Street while hoping America somehow gets through it with our founding principles intact…….

  51. Robert

    I don't think that the work stress of investment banking gives anyone the right to behave badly or be over-compensated. There are many, many laborers in this country who toil for 60-80 per week just to carry on a basic life. They receive a heavy tax on their future health and risk their current health every day on the job.

    Look at surgeons for a minute. They train for about 8-10 years, work for many years below the minimum wage, and selflessly sacrifice to take care of people. A vast majority of them are competent and the malpractice industry culls out the bad ones. Of course, their skill is high and they are paid well, but not TOO well. There aren't many surgeons who make $1 million or more year. The Hippocratic Oath keeps them basically honest.

    The problem is that there is no code in the financial industry and no leadership that keeps people in line. I'm not talking about the SEC regs, I'm talking about a code of ethics. Moreover, the pension funds and mutual funds do not exercise their voting rights and therefore bad behavior runs rampant. Clearly, clawbacks should be demanded by anyone who runs money.

    What is needed is some type of malpractice insurance or E&O insurance for financiers. They should be forced to subscribe to a policy like any professional. The policy would have the right to dip into some type of escrow account and take back any ill gotten gains.

    You have to come up with financial incentives that encourage good risk/reward behaviors.

  52. Bruce

    Are you familiar with the work of Jerome Guillet, an Energy Banker based in Paris who writes for European Tribune?

    He coined the term Anglo Disease to describe what you’re talking about here.

    “In the 70s, the Economist coined the label “Dutch Disease” to describe the economic travails of the Netherlands as the country’s export-oriented industrial sector struggled with the increased exchange rates caused by the rapid growth in gas exports that followed the discovery and development of the massive Groningen field. The extractive sector was so profitable that it captured a large share of new investment, and its export volume was large enough to alter the trade balance and boost the currency, further rendering other activities less attractive.

    Today, we can observe a similar phenomenon on a large scale around the financial industry, whose high profitability for many years has also caused weakness for other sectors of the economy. As this has developed around the money centers in New York and, in an even more concentrated way, London, I would propose to label this the “Anglo Disease.”

    The whole thing is worth reading.

  53. Anonymous


    Have you ever been in the military? I like your blog, but you seem to be extremely narrow minded when talking about job stress. So you worked some crappy jobs? Try a combat zone for about $30,000 a year. I have no doubt most financial workers would fail in that environment. I also don’t see those salaries heading into the 6 figure range. I see now part of the problem with idiotic salaries is the sheer lack of experience elsewhere — the financial world really is an echo chamber.

  54. Stephen

    Miguel Swanstein Siag,

    “….but I often wonder about what types of personalities “rise” to the top of such a system”

    ulm….Richard Fuld, John Gutenfruend, Henry Paulson, Mr Rubin, the current head of Citibank or any of the last couple of heads of Citibank.

    Fuld ran Lehman for 18 years….it was his creature, his structure and his culture 100% completely. The fact that he seems unable to accept utter and complete repsonsibility for his own creation when it tanks should just about answer your question.

    Not trying to create scapegoats, but usually the benefit of success matches the price of failure. apparently not.

    The most telling item is that the losses have wiped out the profits of the previous 5 years maybe more. The fact that one keeps the bonuses from temporal anomoly, you were able to be measured before the full results of your effort were apparent, is pretty close to a definition of kiting.

    I am not angry about capitalism, I am angry capitalism and free markets are being gamed. Sadly not all will agree and we may find oursleves in a worse place over time. Once agian not trying to scapegoat people, but some personal bankruptcy, heavy fines and jailtime for some of these people who should have known better would go a long way.

    Show trials never go out of style ;-) (snark off)

  55. Anonymous

    The basic principle of what has gone wrong is that there has been a massive over supply of money looking at a disproportionally small safe investment market . As a result there has been a large amount of pressure on reducing regulation . What should have happened is that corporate and personal borrowing limits – ratios to capital and income – should have been maintained . This would have forced the holders of the money to directly deal with the imbalance rather than leaving it up to the collapse .

  56. ThatLeftTurnInABQ


    As a long time lurker (and on very rare occasion a commentor) I don’t have much to add to the chorus of huzzzahs here for an outstanding post.

    Looking forward to a time when the present crisis is behind us and we are building the metaphorical levee system to prevent this from happening again (or at least not for another 3-4 generations), I have an observation and a question.

    First the observation: the institutional culture which you describe which created this mess strikes me as a classic example of group-think at work. What is most striking about the Wall St. culture as described by you (and others who have been doing the yeoman work of digging out the roots of this crisis) is how insular and narrow it is, and how deeply inbred and self-contained its intellectual basis is. From that perspective it seems to me as if part of what has gone wrong on Wall St. is that over the last several decades it has been far too successful at sealing itself off from the rest of the world, both physically and mentally.

    Second, the question: How can we fix this problem? For example:

    What can we do to encourage a more open exchange of ideas between the people who make the world of finance work and the rest of us? How can we get them to adopt ideas, or at least a sense of perspective, from the natural sciences or other intellectual disciplines which have the potential for cross fertilizing their world in a productive way.

    Are the Business schools nurseries for catastrophic group-think? Should they be shut down and replaced with something else less narrowly focused?

    Would it be better if people in finance were required to take sabbatical leave periodically in a manner similar to academia, to get them out of the group-think environment?

    Are they too young? Are we putting too much responsibility in the hands of people who have not had sufficient time to educate themselves and acquire the necessary breadth of interests and exposure to ideas from outside of finance?

    If this is a cultural crisis as much as it is a systemic problem, how do we deal with it at that level?

  57. GC

    “….but I often wonder about what types of personalities “rise” to the top of such a system”

    IB’: sociopath heaven .

  58. Anonymous

    I find the reaction against Yves’ comments about the IB work environment curious and overly emotional. They did not read clearly what Yves said, She was NOT defending the pay for that sort of work, merely explaining that that is one of the ways the IBers come to feel entitled.

    And unless you have worked that environment, I don’t think any of you can say with confidence how hard it is. You have ongoing physical exhaustion, plus very high stress levels (the time pressures plus the abuse/error intolerance) in combination. Differences in degree typically lead to differences in kind.

    I agree that being at war is also terribly stressful, and war injuries and post-traumatic stress disorder can leave life long devastation, but Yves is talking about a different issue, or I think she is: the sheer intensity, the requirement to endure in a situation most would find intolerable, for stress, burnout, and limited/lack of control over substance.

  59. luther

    perhaps it's not so much the particular wrapping (IB's, military, janitorial, service, etc) that should be questioned, but rather the underlying substance —

    a culture that cherishes and relishes and rewards competition IN EXPENSE OF cooperation

    where the solidity of the individual (amidst its coincident alienation) hardens any sensitivity to mutual respect and dignity (which strengthens the foundation of trust — the bedrock of any & every system)

    where the constant violent interplay of dependence & independence stifles any meaningful understanding of the vital role of interdependence.

    and where infinite myths obscure finite realities rather than infinite realities revealing & revising finite myths.

    for even if this is ALL just a zero-sum game, then in the end…


  60. hapa

    hello yves, greetings from the fringes of the blogsmos, thank you for your hard work, it’s been very good reading and helpful.

    i already seconded your post here somewhere else. this comment is to second nate hagens’s bit about the planetary economy, you know, and to suggest as a bridge to a wider definition of our “productive sector,” a book!

    PLAN B. by lester brown et al.

    aka, “mobilizing to save civilization.”

    if you’re in the mood to extend your metaphor, that’s a good hybrid vehicle for it.


    ps. hopefully this isn’t a dupe, there was some slight server madness.

  61. Anonymous

    V. Good Post & V. Good Comments.

    Cutting to the chase as customary:

    1) Ivy League crowd to Wash. crowd (and as well as the rest of the media and univ. "professional class" crowd) are out of touch with real life and real people's lives. They are at a distinct disadvantage. They don't even know they're clueless because they operate in their bubbles.
    2) Financial crowd lacked the requisite personal development and maturity with tested mettle to deal with OPM (other people's money) in public trust.
    3) The Financial Center grew to be too large and operated more like the Politboro.
    4) Too little respect for and too little skin in the game for dealing with public treasuries of other people's money and the ramifications for their country and people. (or the harm to other nations). Which leads to No. 6.
    5) All involved should be stripped of all their bonuses and assets(to basic Soc.. Sec. level), and put on a Devil's Island for a lengthy period.
    They should be told they should consider themselves lucky they won't be shot at sunrise.
    All involved includes the execs. and layers of key aids involved at AIG, Goldman, etc. etc.
    That includes Paulson and the whole crowd who dreamed up these "weapons of mass destruction", peddled them, and then bailed their cohorts.

  62. Anonymous


    Thank you for this cri de coeur which could not have been easy to write. I read this blog and its very insightful comments faithfully, but I rarely comment because I’m clearly out of my league here.

    However, as someone who teaches at a university that likes to flaunt the high rankings of its business school, I can tell you that we’re in more trouble than most of us realize. My students seem utterly nonplussed about the staggering levels of debt they’ve taken on to prepare themselves for jobs that are disappearing forever. Swaddled in their current comfort of overextended social networking, they remain steadfastly oblivious to the world beyond their Friends List, assured that their innate talents will be instantly rewarded the day they pick up their diplomas. There are bubbles, and then there are bubbles within bubbles.

    What will happen when these Peter Pans finally come face to face with the real Captain Hooks?

  63. Platypus

    Great article, Yves, but all the stuff about how hard investment bankers work seems very much part and parcel of the exceptionalist mindset you lambaste. Even in your defense of that portrayal, what’s strikingly absent is any worry about how job performance might affect anyone but oneself. Every small business owner has to worry not just about tarnishing their own career but costing employees their livelihoods. Doctors have to worry about patients dying. Skippy provides an even more cogent military example, for which I’m grateful.

    I’m a software engineer. We also pull plenty of all-nighters, deal with conflicting demands, and can see our entire job or even career laid waste by a single misplaced character. So do people in many other fields. Nonetheless, if I were to mope around about how hard it is for me, the small-business owners and doctors and military personnel would be absolutely right to tell me to get the hell over myself.

    The financial crises will not stop until the people in the financial industry stop thinking they’re so special. You made that point well, but clearly there’s still much progress to be made.

  64. Yves Smith


    You assume I have worked in no other field than finance. I have worked in other positions, in fact worked with startups, run my own business.

    I have said repeatedly that the work environment does NOT justify their outsized pay (by that argument, front-line soldiers should be top of the heap in terms of pay) . However, I have not encountered ANY field (and I have worked in six continents) where the time pressure is even remotely as intense and unrelenting as investment banking, That is a qualitative difference that is almost impossible to convey unless you’ve lived it.

    With all due respect, every software project I have been involved with has missed a major deadline (and I have worked with players that are very highly regarded in their fields). That simply cannot happen on a Wall Street deal. So you cannot generalize from your own experience here.

  65. jesse

    In my world, we call these sorts of debates authenticity battels: who works harder, who is more working class, who is under more stress, etc. etc. For the most part they are a dead end – because ultimately we all only know our specific circumstances.

    What most interesting about Yves observations is not – in my opinion – to assume a comparison with other stressful lines of work, but to ask how the specifics of this particular job creates a particular stressed out community at the heart of the financial crisis. The same could be asked of all these professions – how the stresses of computer programming, the stresses of low wage service sector work, the stresses of being a medical resident, all work towards creating specific communities of workers, and working identities.

  66. Platypus

    Yves, it’s going to be a long time before software engineers have to take any crap from (present or former) investment bankers about screwed-up projects. I wasn’t trying to generalize from my experience; I was trying to make the point that you shouldn’t (over)generalize from yours.

    OK, now that we have that nastiness out of our respective systems, did I mention that yours was a great article? As you so eloquently put it, the idea that the needs of the financial sector can trump those of the productive sector is dangerous and destructive to our collective well being. I’m merely extending that from needs to concerns and experiences generally. The practitioners of high finance should by now have given up not only their expectation of high rewards, but also their expectation of great respect and deference. We should all listen to our plumbers more carefully than our financiers. OK, bad example. ;) How about carpenters? The point is that the arrogance of people in finance goes beyond the way they treat their direct customers. If you want to tackle fundamental causes, as you say in your second paragraph, it’s the finance industry’s general egocentrism and lack of respect for any profession but theirs that must be addressed. In that context, stories about how hard life is on Wall Street seem a bit counterproductive.

  67. thegeniusfiles

    Terrific article! I don’t think you take it quite far enough, though. This crisis is not entirely about bad management. It’s being packaged and sold that way. Once the smoke clears, you will see winners. Cui bono; ask yourself. Are the winners bad managers too? Or is this, rather an example of extremely good management of an agenda which happens to be detrimental to many or most – but not all.

Comments are closed.