Banks had traditionally been conservative organizations emphasizing risk avoidance, modest compensation, gradual promotion, and secure tenure. When in the deregulation era they were permitted to expand into riskier and (therefore) more lucrative forms of financial intermediation, they attracted a different kind of employee--smarter, more willing to take career as well as financial risks, more independent, and demanding higher pay. Because they were generating more profits for the bank, their influence grew and placed pressure on the traditional bankers to take more risks in order to hold their own in the struggle to control the organization. So one proposal for preventing a recurrence of the financial crisis, since the crisis was due in part to highly risky lending by banks, is to restore the separation codified in the Glass-Steagall Act of conventional banking from high-risk forms of financial intermediation.
Becker, on why actions should have no consequences:
I have not seen convincing evidence that either the level or structure of the pay of top financial executives were important causes of this worldwide financial crash. These executives bought large quantities of mortgage-backed securities and other securitized assets because they expected this to increase the average return on their assets without taking on much additional risk through the better risk management offered by derivatives, credit default swaps, and other newer types of securities. They turned out to be badly wrong, but so too were the many financial economists who had no sizable financial stake in these assets, but supported this approach to risk management.
There you have it. Those business school geniuses who pushed us to the brink of ruin through reckless behavior deserve every penny of their pay, despite having been colossally and disastrously bad at their jobs. After all, even financial economists couldn't see the possible harm of their actions. And if we do cut their pay we'll give them an incentive to move on to other companies, which will then give those companies a competitive advantage over the government-supported companies. Ha! That's a bit like suggesting we'd all better be extra nice to ex-President G. W. Bush because he might head off to give a competitive advantage to another country by lending them his superior governing skills.
So if you've lost your job in the ensuing economic meltdown that these goons helped to trigger and you think they ought to at least take a paycut while their companies help themselves to the public treasury, remember: they make more than you because they're smarter than you and they're better than you. Consequences are for the little people.
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