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Motivation Revisited - With a Focus on Wall Street

Posted by MacZad
Jul 11 2012

A recent post illuminated the workings of money as a motivator and how it fails when brainpower is essential to job performance.

Now the June 2012 issue of The Atlantic has an article, The Real Cause of the Crash, that focuses on Wall Street's financial incentives and how they endanger us.

It starts with this great cartoon:

And concludes with these two paragraphs which sum up the article very succinctly:

The problem on Wall Street has never been about the absolute amount of leverage, but rather about whether financiers have the right incentives to properly manage the risks they are taking. During Wall Street’s heyday, when these firms were private partnerships and each partner’s entire net worth was on the line every day, shared risk ensured a modicum of prudence even though leverage was often higher than 30-to-1. Not surprisingly, that prudence gave way to pure greed when, starting in 1970 and continuing through 2006, one Wall Street partnership after another became a public corporation—and the partnership culture gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money in order to generate revenue and big bonuses.
People are pretty simple: they do what they are rewarded for doing. If they get multimillion-dollar bonuses by taking huge risks with other people’s money—as they still do—then they will continue to take those huge risks, and not give it another thought. To prevent another crisis, Wall Street’s top executives, bankers, and traders should once again have something close to their full net worth on the line every day—not just the portion represented by company stock or options—so that they will collectively take risk management more seriously. That’s a solution that has nothing to do with the amount of leverage on Wall Street’s balance sheets.

While there were undoubtedly other factors involved in causing the recent crash (i. e. faulty Federal Reserve policies - the subject of a future post), the article certainly makes it clear that the public ownership of the Wall Street firms resulted in large-scale gambling with other people’s money thus endangering the country's financial stability. It's a situation that cries for reform. Sadly, contribution money flows freely from Wall Street to the Washington leaders, and they don't seem to have the fortitude to reject it and undertake the necessary reforms.

Categories: Opposing Plutocracy and Corporatocracy, Seeking Better Governance