Leif Pagrotsky on Wall Street Excess
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Rewarding the financial industry for missteps and passing the buck is inherently wrong, says Leif Pagrotsky.
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Leif Pagrotsky:

Leif Pagrotsky is a Swedish Social Democratic politician, who had various posts in the government of Göran Persson between 1996 and 2006. In 1997 Prime Minister Göran Persson made Pagrotsky Minister of Trade and in 2002 Minister for Industry and Trade. One of his most publicly known activities during this period was his efforts to promote Swedish popular music export. In 2004, he switched posts with former Minister of Education Thomas Östros. At the same time, the responsibility for cultural matters, previously belonging to a separate ministry, was added to Pagrotsky’s portfolio. Pagrotsky has a Bachelor of Arts and a Master of Science in economics from Gothenburg University. Before joining the Cabinet, Pagrotsky worked at the Central Bank of Sweden and in the Ministry of Finance.
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TRANSCRIPT:

Question: What is Wall Street’s fundamental flaw?

Pagrotsky: What disturbs me about Wall Street is not that individuals who bet their own money can win if they are smart. What disturbs me is the reward system in general for employed people, that if you take big risks, if you incur big risks for your company, big risks are usually connected with high prices. Then, you earn a big bonus. But when that risk materializes and you lose, you don’t lose. Somebody else loses. Maybe not even your employee. Maybe the taxpayers. I think the bonus system, the way it has been designed in the United States, on Wall Street in particular, has amplified volatility in the markets. It has produced excessive risk taking, it has produced the excesses in lending to people who cannot pay interest on their debts, for instance, and I think that is at the heart of this problem, and when we come out of this, I say ‘we’ because we are the same in my country as well, this must be part of the lesson learned. This is a destabilizing force that should be part of regulation. I’ve had a public debate with the regulators in my country who say that the remuneration system is something between employees and employers in the financial industry. I say it is not. It is a matter for the regulators because the way remuneration is designed is an important element in stability versus instability of these markets, and that cannot be left to market participants alone.

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