Hoarding of Informational Capital and Golden Parachutes

We all hate it when our tax money is being used to bail out those who created this mess. We all want to teach those rascals a lesson by KILLing the BILL. We all know that this common feeling of revenge resonates with many American hearts, specially when we see Golden Parachute agreements in the bill. Some people, including me, start to question the validity of the Federal Reserve bank, specially when presidential candidate Ron Paul explains it in front of the House and even introduces a bill to abolish it, but lets not go there in this blog post.

Instead let us identify what we don't understand or fail to recognize in our emotionally clouded, revengeful, logical mindset is the outcome of the KILL BILL (pretty much nailed here) and the outcome of removing these Golden Parachute agreements, which we think are a must go.

Now I am no economist (but a programmer), but let us try and use some common sense reverse engineering on why these Golden Parachute (GP) are necessary, the alternative ways they can be paid and the consequences of not acknowledging these GPs.

So let us say I am being offered an executive job (among top 5) at a bank, my job is to design and execute profit making policies and packages at the bank, that is a huge responsibility. I know that economy being the most unscientific pillar of our society (apart from religion), has its risks and if I screw up at one bank my career is almost over or I will be out of job for few years atleast. So how do I protect myself when sky catches fire, I demand a Golden Parachute. The hiring bank, running out of opportunities to make profit from the market as time passes, knows how difficult it is find someone with the skills in fuzzy science of economics, so they agree. I know that this is GP is driven by excessive greed, selfish and fearful mentality of mine, but the hard fact is that when one starts to make more they want more, hence I need bigger salaries and big parachutes.

Now let us see the alternative ways of paying these GPs when the bank is going belly up. One is through government bailout and the other is selling assets as a part of executing a bankruptcy. The latter option is much worse than the first option coz it liquidates almost 100% of the bank's assets, leaving very few chances of recovery and an almost certain extinction (I would like to know your thoughts on this since I know less about bankruptcy).

You must be thinking What if the government bailout fails to removes these existing GP agreements from the bill? There are at least two possible outcome of it. 1) I as an executive will use my power to worsen the current credit squeeze by hoarding the information capital necessary to identify low risk borrowers and to create low risk loan packages. If I am unable to do so (if I have been fired or the bank is extinct), I will lay low for next 3-4 years and not share the information and experience which is the real horse power behind the banking engine to issue credit. This is exactly what happened in the great depression. The lesson to be learned is that although this is a free market economy (at least it is purported to be) the real blood in the arteries of the economy is the flowing credit. Any long term blockage and you have an angina.

The other outcome of not acknowledging these GPs will be 1) loss of confidence in contractual agreements which will again be detrimental to growth and 2) the reflection of a communistic/socialistic style not a capitalistic style of governance (high risk high reward i.e. competence).

So these Golden Parachutes to me seems like a necessary evil of our times and this bitter fact will have to be swallowed by us, as it is the combinatorial effect of our greed too which brought about the current crisis, after all no one forced us to buy houses we knew we couldn't afford, we just got tempted to take the risk. Well so did these executives.