Wednesday, 17 September 2008

That financial crisis

We've heard an awful lot of shouting and screaming from various leftist types about what's been going on in the markets over the past few weeks/months. What we haven't been getting (in my own ever so humble opinion) is anything very useful being said by them. It all seems to have been stuff cooked up from the Cliff Notes version of Das know, capitalism facing it's inherent contradictions sort of thing.

So I'd like to point you to a very good article (in my own ever so humble opinion of course) in this morning's Times.

Essentially, hedge funds aren't going bust any more than they were a year or five years ago. But the big financial companies are. Why?

They're both working in the same markets, so it can't be markets that are wrong.

Chris Dillow (he's of the left but he's that rarity, an intelligent lefty) points out that it's likely to be a well known economic problem, the principal agent problem.

This might be a little too much economic and technical jargon for which I apologise, but it's a great insight into what has been going wrong.

For example, traders getting huge bonuses if they take large risks and they work....but then not suffering any pain or losses if they fail. The shareholders pay out huge amounts in the good times to the traders but then the shareholders have to carry the losses in the bad and the traders don't....that's the principal agent problem at work.

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