Former RBA Governor: huge executive bonuses broke the economy

[depakid]

:think:

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WITH the economy close to actually starting to shrink, the former governor of the Reserve Bank has pinned the blame for the financial turmoil on executives who took excessive risks to secure multi-million dollar bonuses.

National accounts figures released yesterday painted the weakest picture of growth for eight years.

<snip>

The Bureau of Statistics report came as Ian Macfarlane, in a rare public appearance, told the Lowy Institute in Sydney last night that excessive debt and risk-taking, driven by the misguided belief that double digit investment returns could last forever, was the root of today's problems.

Mr Macfarlane, who witnessed a huge expansion of debt during his decade in office, pointed the finger at a complex system of perverse incentives that had rewarded those who chased high returns and chose to "ignore or downplay the risks".

These included mortgage brokers, who earned commissions for writing loans to as many people as possible, and international credit rating agencies, who were paid for their services by the promoters of debt.

"The biggest misdirected incentive was the performance-based pay structures which awarded massive bonuses to the management of financial institutions on the basis of short-term profit results," Mr Macfarlane said. "Annual bonuses in the millions or tens of millions of dollars were available to the most successful profit earners, and, of course, were not returnable when the short-term profits were lost in subsequent years."

Policymakers around the world, who had previously lacked any "curiosity and scepticism … about what was going on around them" should pay more heed to the risks involved in this type of reward structure, he said.

More: http://business.smh.com.au/business/huge-executive-bonuses-broke-economy-20081203-6qqb.html

[fascisthunter]

1. nah, nah.... it's duh unionze

:crazy:

[depakid]

3. First question that came to mind was: Where were you, Governor when you had direct influence

over policy?

This is not exactly a new observation- any undergrad in business administration should have been able to tell you what the consequences of short term profit maximization- inordinate focus on quarterlies at the expense of longer term stability and sustainabilty are.

[aquart]

2. Who is this dangerously leftwing radical?

[exboyfil]

4. The compensation committee members should have testified

in front of Congress. Most folks will try to maximize their salary (hopefully many are ethical enough to not do this to the detriment of the institution paying their salary).

This is one of the biggest reasons why I had a problem with the bail out. The folks who should have known better benefited and were in no way punished.

I am not sure a top down approach is the best solution. More active shareholders may be a better solution starting I think with the large mutual funds like Fidelity and Vanguard.