Monday, March 16, 2009

There's crime, then there's...

To get some perspective on what's going on, I looked up the total direct losses from property crimes in the US. This totalled $17.6 billion in 2006. Meanwhile, the cost to US taxpayers, for one firm alone (AIG) are around $170 billion (and quite possibly going to increase further). That's almost 10 times more than all property crimes.

These property crimes were committed by many thousands of people. Those who were caught are now languishing in prison in the US (often under truly horrific conditions). Amazingly, just a few hundred people at a single AIG division in London were responsible for much of the insurer's woes, and thereby played a key role in getting the world economy to where it is. These people, having been rewarded very handsomely all these years, are now getting another half a billion dollars in "retention bonuses". These people and their managers don't seem to care one bit about the economic chaos and mass hardship their actions have helped cause, so it's not entirely surprising that they don't seem to be taking much notice of Obama's disgust or Geithner's harsh words either.

If there are just two things about the financial crisis I think are worth stressing they are this. First, the crisis was not an outside shock (like a hurricane or asteroid collision) but a consequence of things people in the system did, acting "rationally" under perverse incentives (which still largely remain in place). Second, however you tally up the numbers, the scale of the hit to your wealth absolutely dwarfs things like "normal" crime and benefit cheats.

25 comments:

PghMike said...

One thing that's important to note is that all of these "perverse incentives" still remain in place.

And the companies that caused this, and are supposedly too big to fail, remain too big to fail, ie. haven't been taken over and broken up. Companies like AIG, Citi, and BofA.

Compulsive Theorist said...

@PghMike

I totally agree re: too big to fail. Current policy is (i) leading to bigger firms, not smaller ones, and (ii) magnifying the "moral hazard" problem by further increasing the confidence of the financial sector in its ability to get away with almost anything.

This leads to me to believe that if we don't change course soon, the next crisis will be even bigger, which is not something I want to see.

Anonymous said...

The key difference, of course, is that we as a society have agreed that it's illegal for people to sneak into our homes and carry away our possessions, but legal to gamble billions of dollars of other people's money even if it wrecks the whole economy. If the vast majority of Americans who are not investment bankers and trust fund managers lack the political power to make these activities illegal now, do we still have a democracy?

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