Posted by: Nicholas Davis | March 26, 2009

Comic du jour

Randall from XKCD demonstrates an important facet of the AIG debate: when we start talking in policies valued in trillions, companies failing and losing billions, yet focus on issues related to millions, we need to ensure that we understand the difference in scale between these numbers. While it’s very true that we should look after the pennies, right now we have a trillion-dollar problem, and some people are getting distracted and outraged at the wrong end of the spectrum.

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Responses

  1. I question your “wrong end of the spectrum” comment. A lot of the rage stems from the fact that it is these (small) short term performance bonuses that encouraged bankers and insurers to take risky decisions that eventually led to the financial crisis, yet, at the time of greatest failure, they are still getting rewarded. This is not so much looking after the pennies as looking after the trillion dollar banking system, which relies on the decisions of the people getting these “small” amounts of money. If we are to stop this crisis from happening again we need to make sure these people are incentivized to make decisions that are in the best interest of the system, and this is not through awarding bonuses for short term decisions and failure. I agree there is another, concurrent need to get out of the crisis, but I don’t think we should ignore the problem of bonuses based on short term performance and their consequences in the meantime.

    • I completely agree with your point – we need to sort out the asymmetric payoff issue and deal with bonuses in the financial industry in a much smarter way. My issue comes from the fact that it is not congress that should be doing this right now – they should be supporting stabilization efforts while delegating the nuts and bolts of designing a better bonus system to others. The time by our leaders spent on the bonus discussion in the context of AIG would be better channelled elsewhere right now, IMHO – but the outrage should definitely be channelled into concerted efforts to develop universal principles to prevent bonuses creating similar problems in the future through a “heads I win, tails you lose” incentive system. I’m with you on the fact we can’t ignore this.


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