What about the people?

In the 1980s, the brightest and most ambitious students went to McKinsey and the management consultants. In the 90s, PWC and the big audit firms were the destination of choice. This decade, it was Macquarie and the investment banks.

Sadly, there is a whole generation of smart graduates stuck in an unproductive sector which is now deleveraging, which means ''de-staffing'' and therefore decline. Happily, some have engineering and other such qualifications which ensure they can be redeployed into the real world as a bloated finance sector shrinks.

David Murray, chairman of the Future Fund and formerly chief executive of Commonwealth Bank went some way to nailing the failure and the challenge of global markets last night on the ABC's 7.30 Report.

There were three issues, said Murray: macro-economic, the system itself, and ''the behaviour of people''.

On the first, interest rates had been too low for too long and allowed assets to be bought for too much.

Then there was ''the system'', which had failed particularly in the US and needed ''re-regulation''.

''The people issue is more of a tragedy,'' said Murray, ''because very bright people have been employed in the financial system, having been to some of the best universities and that talent has been used creating things that have cost the taxpayer a lot of money.

''And rectifying that is difficult. I don't think that's a thing we can solve now. I think the transfer of assets and risk to the public sector has to be taken on now. But that people issue will come back and sometimes I wonder whether we shouldn't be paying our people in the Reserve Bank and APRA and the Treasury more, and people in the financial markets a bit less.''

Hear hear. Ironically, Murray had been a prime beneficiary of ''the system'' and the macro-economic boom himself having been the executive steward of the CBA through its privatisation until stepping down a couple of years ago, and he probably pulled out $100 million in pay.

Still, there would be few so uniquely qualified to judge the system. Indeed there are many who are calling for the Future Fund to recapitalise the banks!

Asylums under new managment

The number of workers employed in productive industries has shrunk radically as a proportion of the workforce in Western countries. Apart from primary produce most of what we consume comes from Asia.

The manufacturing base has mostly shifted offshore and there is a radical workforce realignment in the works.

As one former Wall Street insider confided in this reporter today: ''As it gets worse the power dynamics between stakeholders will change fundamentally with the central banks and academics becoming ever more influential and powerful in the debate about short-term stabilisation and long-term policy response. That is a good thing because the lunatics on Wall Street [and their factions at the Fed and Treasury] have been running the asylum for at least a decade too long now.''

Policy will change and so will the structure of the workforce. As Murray was intimating, the regulators watched this crisis unfold before their eyes. They were almost cowed by the supposed brilliance of the new financial elite.

The looming issues of risk and regulation had certainly been brought for debate in some sections of the press and the corporate governance community - though the media can share some blame for believing the hype.

One sliver at a time

Every dollar which passes through the tortuous gravy train of the financial system has been leveraged, cut up and diluted by all manner of useless products and services.

A fraction of every dollar was shaved away by derivatives on property, equities and debt, by asset consultants, fund managers, mortgage and share brokers, by financial planners with their trailing fees by securitisers, ratings agencies, traders in every manner of security, currency and commodity. All paid a poultice.

Then there are the companies and their assorted service providers: the investment bankers,  remuneration consultants, ``independent experts'' to bless the transactions, proxy solicitation advisors to solicit votes, PRs for media, internal and external, advisors for tax and leasing, corporate governance experts, management consultants to tell managers how to manage.

The dazzling array of financial products - from CLOs and CDOs through  ETFs, ETCs, all manner of warrants and options, futures, long-short funds, hedge funds, funds-of-funds, index funds and so on, on and on - all piling leverage on leverage.

The $1 became $10 and was split 100 ways.

All these hangers-on who sprouted and flourished during the boom are now endangered species. Most of them, at least in their vast numbers, are simply not required. In these numbers, they are an excess which imposes a burden rather than a benefit on productive society.

They are often some of the brightest people too, and many will need to be redeployed in other sectors.

Then there are the legions of lawyers and other professionals who service them. The explosion in credit growth which once bore them will spurn them. Already, the pain is being felt at the Big End of Town.

The 33 largest financial institutions in the world made $US295 billion in net income in 2006. That fell to $US235 billion in 2007 and only $US60 billion in the second half. S&P estimates they will deliver a total of $US110 billion in net income for 2008.

Meanwhile, provisions for the top 33 are tipped to rise three times from 2006 levels and are forecast at $US185 billion in 2008.

And that was before last week.

mwest@fairfax.com.au
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