Bankers excessive salaries as predictors of Depression

Chart shows excess wages over mean for financial sector from NYU- (hat tip Paul Kedrosky) as a predictor of recessions / depression it...well, the implications are clear.

Though what I don't understand yet is exactly how the conditions arose for the rapid climb in the last 15 years. When I was newly out of college, other professional salaries were roughly on a par with bankers - but the difference skyrocketed from c 1990 on, leading to probably one of the biggest misallocations of talent and resource in the West in the last 200 years (ie ever since the Age of Revolutions took hold and Ancien Regimes were toppled or reformed) and I would hypothesize has contributed hugely to the US's (and UK's) loss of competitiveness across many sectors in that time.

As to why, once it starts the system dynamics are pretty unsubtle - as the Economist noted today, the main problem is that banking also suffers from adverse selection issues as well, as fear moves to greed in the boom time:

...as a boom takes its course, fear is supplanted in what a senior quant at an American bank calls the “Cassandra effect”. The more you warn your colleagues about the tail risks—the rare but devastating events that can bring the bank down—the more they roll their eyes, give a yawn and change the subject. This eventually leads to self-censorship. “The system”, he says, “filters out the thoughtful and replaces them with the faithful.”

And it was an escalator....

.....it has seemed as if everyone in finance has wanted to be someone else. Hedge funds and private equity wanted to be as cool as a dotcom. Goldman Sachs wanted to be as smart as a hedge fund. The other investment banks wanted to be as profitable as Goldman Sachs. America’s retail banks wanted to be as cutting-edge as investment banks. And European banks wanted to be as aggressive as American banks. They all ended up wishing they could be back precisely where they started.

Greed without Governance, allowed to build over N years, equals depression, and its absolutely predictable - now isn't that depressing....