A Crisis So Severe, Those Responsible Are Bailed Out

Some of the bail-outs have also been accompanied with charges of hypocrisy due to the appearance of “socializing the costs while privatizing the profits.” The bail-outs appear to help the financial institutions that got into trouble (many of whom pushed for the kind of lax policies that allowed this to happen in the first place).

Some governments have moved to make it harder to manipulate the markets by shortingduring the financial crisis blaming them for worsening an already bad situation.

(It should be noted that during the debilitating Asian financial crisis in the late 1990s, Asian nations affected by short-selling complained, without success that currency speculators—operating through hedge funds or through the currency operations of commercial banks and other financial institutions—were attacking their currencies through short selling and in doing so, bringing the rates of the local currencies far below their real economic levels. However, when they complained to the Western governments and International Monetary Fund (IMF), they dismissed the claims of the Asian governments, blaming it on their own economic mismanagement instead.)

Other governments have moved to try and reassure investors and savers that their money is safe. In a number of European countries, for example, governments have tried to increase or fully guarantee depositors’ savings. In other cases, banks have been nationalized (socializing profits as well as costs, potentially.)

In the meanwhile, smaller businesses and poorer people rarely have such options for bail out and rescue when they find themselves in crisis.

There seems to be little sympathy—and even growing resentment—for workers in the financial sector, as they are seen as having gambled with other people’s money, and hence lives, while getting fat bonuses and pay rises for it in the past. Although in raw dollar terms the huge pay rises and bonuses are small compared to the magnitude of the problem, the encouragement such practices have given in the past, as well as the type of culture it creates, is what has angered so many people.

Side note on those taking on risky loans in the subprime market»

Nobel prize winner for economics, Paul Krugman, commenting on Bernard Madoff’s $50 billion fraud, notes that much of the financial services industry has been quite similarly corrupted:

The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. … The vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.

… But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

… At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way.

— Paul Krugman, The Madoff Economy, New York Times, Opinion, December 19, 2008

How was this possible? Former chief economist of the IMF (and recently appointed Indian Prime Minister’s economic adviser), Raghuram Rajan wrote a paper back in 2005 fearing financial development in its current form may be risky . One of the main reasons was the incentive/pay mechanisms for investment managers that not only rewarded risky behavior, but perhaps encouraged it. (Because he also feared that this form of finance capitalism could have serious negative effects as well as the positive effects being seen back then, he of course was ignored and somewhat ridiculed at the time, because it was at the height of the economic boom.)

In the article mentioned above, Krugman opines that “there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.”