Banking Compensation and Debt Addiction

Why do physicians recommend NicoDerm skin patches or Nicorette chewing gum to smokers who are trying to kick the habit? Why don’t they simply recommend that smokers go “cold turkey” and stop ingesting harmful chemicals?

Alcoholics, after all, aren’t given smaller and smaller bottles of liquor over time when they enter rehabilitation. They’re simply required to stop drinking. So why are smokers encouraged to wean themselves away from their addictive habit in a progressive manner?

The choice of detoxification method apparently depends on the nature of the substance itself. Nicotine, for instance, becomes less addictive as individuals reduce their ingested volumes, and thus an incremental “weaning” approach can be effective. A single glass of liquor, however, can throw a recovering alcoholic back into full-scale addiction, and thus a “cold turkey” strategy is often the preferable one.

On Friday last week, Morgan Stanley became the first of the mega-sized Wall Street banks to announce its annual employee bonus plan. That announcement may not have brought much pleasure to their rank-and-file workers, but it did provide support to those who conceptualize our current economic malaise in terms of nicotine (as opposed to alcohol) withdrawal.

Addicted To Debt

It isn’t very difficult to find references to debt “addiction” in the global press. The characterization pervades the world of global diplomacy as well; a Chinese government press release, for instance, recently excoriated America’s federal government for failing to address its over-reliance on credit.

But government leaders around the world can’t seem to reach a consensus about the appropriate method for treating this addiction. British Prime Minister David Cameron, for example, was elected with a mandate to slash government debt immediately, even if it necessitated a fundamental downsizing of the national social safety net. On the other hand, even conservative Republicans in the United States have advocated for a more gradual approach; many would prefer to place America on a glide path to debt elimination.

Which approach is the optimal one: a dramatic slashing strategy or a glide path reduction plan? The recent evidence is mixed and thus non-conclusive. Although nations from Germany to Thailand opted for more radical approaches during the past decade and appear to be reaping the benefits of that approach, many European nations (such as Greece, Italy, and now Britain) are finding that government austerity policies can douse economic growth and thus accelerate national decline.

Just Say No

Sometimes, of course, cigarette smokers and alcoholics begin to modify their behaviors without taking the time to develop conscious strategies and plans. Heavy smokers who reek of cigarette smoke may start to reduce the number of packs they consume each day, without enrolling in formal detoxification programs. And binge drinkers may start to tire of awakening to debilitating hangovers, and thus may decide to “just say no” to multiple drinks when they hit the bar.

In other words, sometimes addicts begin to moderate extreme activities on their own, without professional intervention or guidance. It is possible that this natural process is occurring in the American economy as well.

Last Friday, for instance, Morgan Stanley announced that its employee bonuses would be capped at $125,000, even though strong performers had grown accustomed to payments many times larger than that limit. And with the other major Wall Street firms soon expected to follow suit, industry experts have begun to speculate that the entire banking industry is about to enter a natural process of retrenchment.

Debt Appetites

Pundits have offered numerous explanations for the development of this retrenchment trend. Some note that the new Dodd-Frank legislation restricts the abilities of banks to magnify their trading gains (and losses, of course) through debt leveraging activities. Others assert that stakeholders are now resisting the type of highly leveraged buy-out transaction model that was popularized by firms like KKR and Bain Capital during the past thirty years.

And although some pundits argue that the retrenchment of the banking sector is more easily explained by a global lack of consumer demand for products and services and not by a newly emerging distaste for debt, others note that today’s tepid level of consumer demand is in fact attributable to stratospheric levels of residential mortgages and other loan liabilities.

In other words, like an addicted chain smoker who slowly begins to turn from Marlboro and Winston to NicoDerm and Nicorette, it appears that our entire economy is now transitioning away from its debt-fueled addiction. That may explain why, despite the continued willingness of global creditors to lend funds to the American government at interest rates that approach zero, Congress is less and less willing to extend the debt ceiling.

It’s easy for us to be pessimistic and interpret shrinking bank compensation levels as harbingers of a looming economic crash. If today’s prevalent addiction metaphor is valid, though, it may be more reasonable to interpret these bank policies as addiction withdrawal pains that may fade as we transition to a brighter future.