EU-Commission fines mayor financial institutions – but is it enough to regain trust?

Since the collapse of the former banking house Lehman Brothers in 2008 it has become clear that our current wealth is at stake. Now experiencing a fierce global financal crisis, western countries are deep plunged into debts. The White House was proposing to plug tax loopholes by “curbing deductions for the most affluent taxpayers and forcing million-dollar earners to pay a minimum rate of 30 percent”. (Bowley. 2013). It must bale out a problem that others had let happen. Some elite bankers had been dishonest and manipulated the Libor, Euribor and Jananese Tibor interest rate.

Now the EU-Commission imposed a fine of € 725 million on Deutsche Bank for shady dealings before the year 2008. The EU Commission ordered a penalty of €1,7 billion on mayor banks in Europe and the United States. (Kaiser, Stefan. 2013)

Whilst the Swiss Bank UBS recentlyprepared to pay a fine of around £630m for rigging Libor – more than twice the amount Barclays paid for attempting to manipulate the key interest rate.” (Treanor, Jill. 2012). Now both companies were relieved by the EU-Commission of any penalty for helping the authorities to clear up the case. Deutsche Bank now blames some individual employees for violating the values and beliefs of the biggest financial institution in Germany. (Spiegel Online. 04.12.13)

Are there really individuals responsible for the financial crises around the world? Of course those people who took advantage of the derailed global financial system that has put us in danger, must share the bill. The EU-verdict and former penalties are a first sign of restoring trust by the government. But still “[N]ow the average CEO makes about 369 times as much as the average worker…” (Ariely. 2009. p.17) In Europe 3500 bank employees earn more than one €million a year. (Spiegel Online. 29.11.13) The next step could be a bonuses reduction of extremly high paid advisers in the financial sector. Why do they need so much money in countries where full-time employees can´t afford living on their own?  The previous Obama proposal for more contribution of the richest would be a further step to regain trust in politics.

In accordance with standard economic theories there might have been too many incentives to manipulate economic data in terms of high benefits and low risks of beeing caught in a free market. Behavioural econonmics has proven that simple cost/benefit computations are too simple to explain human behaviour. Humans use mental accounting to assign money to mental categories like losses and gains. Is it applied by the experts who run our financial system? We can assume that they are very intelligent, good at maths and computation tasks. Perhaps that is a part of the problem. Research has shown that “liars have significantly greater white matter volume…compared with normal controls”. (Yang et al. 2005. p.322) Therefore people who cheat, lie and manipulate others are endowed with a better cognitive capacity and higher IQ scores. (Yang et al. 2005) It would be interesting to know about the self-concepts of the cheaters operating in Washington, London and Frankfurt/M. Scientists showed that persons want to see themselves as moral. Do these executives fit in that pattern or do they think that honesty is only a cost with rare benefit? If the latter is true, they might adapt the standard economic model of rational and selfish human behaviour, originated in the philosophy of Thomas Hobbes and Adam Smith. If the former is the case, what conditions helped the cheaters to perceive themselves in accordance with the norms and values of their society? Ariely explains that categorization and attention to ones own moral standards is used to keep yourself in balance. (Ariely et al. 2008) Is it the malleability of the category ´finance business´, commonly seen as shark bassin where everyone must compete and fight for his own rights? With this in mind there is probably no danger of trespassing the individual threshold for fairness. Or is the distance between their column of figures to the Dollar, Pound and Euro coins in our wallets too great? Do they restore a suitable moral self in a secret Physical Cleansing ritual at the workplace? After doing his business a robber baron could go to the lavatory and wash his hands in innocence. (Zhong et al. 2006)

I am sure many extremly high paid Econs will argue that high bonoses are a necessary incentive for their complex cognitive performances. But there seems to be no such value of big bonuses. “It now appears that beyond some threshold levels, raising incentives may increase motivation to supra-optimal levels and result in perverse effects on performance.”(Ariely et al. 2009. p.21) Most interesting is the fact that in experiments individuals with prospect for the biggest bonuses did much worse on their tasks than persons in low and medium bonus conditions. The banking executives confronted with this results assure that “their own work and that of their employees would not follow this pattern and are not interested in further research relating this topic.”(Ariely. 2008) Are they just loss aversive and cling to their current revenues that they see as reference point for further gains? “The fundamental ideas of prospect theory are that reference points exist, and that losses loom larger than corresponding gains.” (Kahnemann. 2011. p.297)

A solution for our worrisome situation could be a better choice architecture on tax forms. After finding one of the Ten Commandments and agreeing with a honor code on top, there should be an opt-out check box on default for higher tax rates to the most affluent persons.

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