From The Mouths of The Elite …

I am a big fan of the Financial Times. One or two of its contributors seem to get things right. But, periodically we come across a column or letter that exposes the thinking of the financial world a little too bluntly. Plus it’s always fun to follow the discussion when someone in that elite group responds to a column written by another of the group. It’s like sitting in a very expensive dinner and listening to dueling millionaires bemoan the price of expensive houses. Things are so bad they simply will have to give up the European tour this year. Oh my: that bad? They don’t get it. They have no idea how odd they sound. Especially given the recent history of their industry and its total ineptitude and reliance on the little people for its continued existence.

In that vein we have two examples.

Weighing in on the plight of Ireland we have a certain Peter Sutherland whose article appears on the comments page. He launches us, with all the required language of a very serious person, into a discussion of the need to renegotiate the EU-Ireland deal that provided bail out funds for that beleaguered economy. That sounds very reasonable to me, especially when I am told that the interest rate on the deal is 5.8% while the cost of funds underlying the loan is only 2.9%. That sounds like a very wide risk premium.

Or is it a premium for something else?

After being told that the need for austerity is self evident – Sutherland says “there is no denying the austerity required” – it emerges that he endorses a slightly lower premium in order to signal that we disavow moral hazard.

There’s that phrase again.

How often have we been hammered with the moral hazard argument? For all the talk about it, we would think that the important folks who worry would have eliminated its threat. The poor Irish are certainly now aware of their foolish reliance on moral hazard. They have to be punished both by harsh austerity with its loss of wealth, and now this premium on the bail out loan provided by other Europeans.

Naughty Ireland. Thinking it could fall back on the old moral hazard trick. How, well, despicable to take advantage of such an evil device.

This all sounds terrific. I, for one, want to root out the risks associated with moral hazard wherever I find it. Especially in finance, where as we now all know, moral hazard was the underpinning that helped turn Wall Street into a casino where the lads at those trading desks could play on regardless of losses, and make fortunes on the basis of knowing nothing, but how to game a tilted system.

With all Sutherland’s obvious distaste for the evils of moral hazard, and his earnest embrace of the hair shirt of austerity as a remedy for the crisis that it contributed to, you might be a little surprised to learn he is the Chairman of Goldman Sachs.

Yes. That Goldman Sachs. The one sitting right at the casino table benefitting from the very moral hazard he now seems to want to cry foul about. He is quick to impose extra costs on the Irish taxpayers. Remember how naughty they all were. He seems less quick to accept a premium on Goldman Sach’s cost of funds which are lower than they might be because investors expect Goldman to be bailed out were it ever in trouble. That market expectation is what we call moral hazard. Perhaps Sutherland should look into it.

Now, I realize that the events and revelations of the crisis revealed the extent of Goldman’s double, triple, and sometimes quadruple dealings, and its almost pathological willingness to profit from customer information, but for someone who is listed as its Chairman to be so baldfaced as to argue for an imposition his company is unwilling to accept, is stretching things a bit too far for me.

If moral hazard is rotten and austerity the just deserts for the Irish taxpayer, then they should be so for Goldman Sachs.

Then again the Irish taxpayers don’t have the same clout as Goldman Sachs. Nor are they as important – vital even – to the safe workings of the world’s financial system. So, come to think of it, Sutherland is right: we should double the premiums on taxpayers everywhere so we have a pile of cash to bail the banks out again when the bust the casino next time.

Yes. Right. No moral hazard there.

Meanwhile, over on the letters page we are treated to the sober insights of another very important financial person. This time it is Michael Mulhall, who is listed as being a Managing Principal, whatever that it is, at Capco here in New York.

His concern is the evils, not of moral hazard, but of collective bargaining by public workers, who as we all know are entirely responsible for the collapse of state budgets across the US. Were it not for these awful bargains the yawning deficits we are struggling with would never appeared. Great Recession notwithstanding. Mulhall is particularly irate about the possibility of a heinous extra New York state tax on incomes over $200,000, which is being relied upon to raise $10 billion to help fill the gaping state budget hole. Such a tax, he assures us, would drive rich New Yorkers to flee the state en masse. Presumably we should look for a Grapes of Wrath style exodus as they all pack up their limos and head to their country homes in a huff.

One of the more interesting habits the elite have when commenting on such matters is that they describe advocates of higher taxes as “well-meaning”. Never has there been a more derogatory word hurled in the current class war. Those of us who try to articulate ideas on behalf of the less well off are constantly being referred to as well-meaning. But, the implication is, we just don’t understand the vagaries and rigors of the wider world. At least not in the way that these important people understand them. Perhaps when we grow up we will. But, as of yet, our silly little heads seem filled with idealistic nonsense about fairness.

At the end of his little elitist homily Mulhall answers his own question.

The question: “What type of country will the US become should Wisconsin governor Scott Walker succeed in eliminating collective bargaining from municipal unions?”

His answer: “A fiscally more solvent, responsible, and affordable one.”

So there you have it. The elite speaks.

The conclusion appears to be that we need to hammer workers with austerity measures in order induce them to behave.

Behave more responsibly.

Once those workers are firmly underfoot the elite will be able to collect its rents, play at the casinos, and otherwise frolic safe in the knowledge that they can continue to afford their luxuries. Safe from having to flee New York. Safe from the risk that their investments might drop in value. And safe from having to concern themselves with the consequences of their own excesses. After all they will always have the workers to clean things up for them.

Above all, the financial system will be preserved for them to play within. And the preservation of that system of systems is the be all and the end all of sound policy. Sound policy, you see, must always focus on securing the safety and soundness of the things that worry the elite. No matter how unequal the national incomes have become. And no matter how indifferent the elite is to the plight of the rest of us.

You may not have known that. But now you do.

Addendum:

As I write this I am watching the devastation in Japan. Those poor people. Their troubles puts the rest we worry about into true perspective.