Pay me, pay me, pay me my money down
The story to date: bankers and financial fidgeters made a great many stupid reckless positively inebriated investments that depended on the ridiculous premise that real estate prices would go on inflating forever as if no living bankers had ever heard of such a thing as a bubble; to the astonishment of the experts, real estate prices suddenly stopped inflating and began to do the other thing with ever-increasing speed; trillions of dollars turned out never to have existed except in the imaginations of the ‘experts’; the US economy turned into a heap of rubble, and the economy of the rest of the world followed suit; the US government, guided by the savvy B-school president and his friend Hank Paulson, formerly of Lehman Brothers, one of the many burst bubbles littering the landscape, dumped $350 billion of public money into the banks with the promise of more where that came from and with no requirements for transparency or accountability or even telling anyone where all the money would go. Got that? Next act.
[E]mployees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year. That was the sixth-largest haul on record, according to a report released Wednesday by the New York State comptroller.
That’s interesting, isn’t it? Employees at financial companies in New York are the very people who caused this global train wreck and the drastic impoverishment of millions, perhaps billions of people – and having brought off this feat of talent and dedication, they were rewarded with large bonuses by the very institutions that are being shored up by billions of public money (money which therefore cannot be spent on health insurance or education to name just two items). Rich, isn’t it? They’re financial wizards; that’s why they’re paid the Big Bucks; in their financial wizardry they make the global economy go pffffffffffffffffffft; so therefore accordingly as a result, they get some more of our money to make them that little bit richer and us that little bit poorer.
What could be fairer or more sensible than that?
That question is ironic. And yet, and yet…they don’t see it. They think they really have earned it, and deserve it, and should get it, and should go on getting it, and should not be told they should not get it.
“People come here because they want to work hard and get paid a lot for working hard,” one investment banker said Friday…“My bonus is ‘shameful’ — but I worked hard to get it,” said John Konstantinidis, a wholesale insurance broker.
They think they deserve it because they worked hard. I can think of a couple of problems with that right off the top of my head. One is that they are not the only people who work hard, yet very few people get the kind of bonuses that Wall Street hotshots get. The other is that one may work very hard in order to ruin everything, and it is not obvious why the mere working hard should merit truckloads of money.
“On Main Street, ‘bonus’ sounds like a gift,” he said. “But it’s part of the compensation structure of Wall Street. Say I’m a banker and I created $30 million. I should get a part of that.”
Say you’re a banker and you made $300 million dollars disappear – should you get a part of that?
Oh look, they’ve gone.
This realy winds me up I work like a slave but I have had to reduce my income in order to keep the work comming in, the guys that cause it get huge bonuses paid for by us. On some level you almost have to admire them for their cheek?
The sad thing is, the tequila sipping banker, probably believes that he and his kind really do create wealth ex nihilo.
But they *do* create wealth ex nihilo. That’s the problem. Stock-market based wealth is premised on the notion that “this is the price you could get for it now, so long as everyone else isn’t trying to sell too” – because if they are, the wealth goes back to the nihil it came from…
And let’s not get into leverage…
Richard,
I guess politicians, when they retire from public office, don’t anticipate too many lucrative consultancies with small plumbing concerns.
If you had only had the foresight to appoint a couple of former cabinet members to your board …
“Say you’re a banker and you made $300 million dollars disappear – should you get a part of that”?
In America it was announced that the FBI had commenced wide ranging investigations into many financial institutions to answer questions like this and perhaps bring bank executives and directors to justice.
The Catholic Church globally is now somewhat a chastened and humbled institution, and all the better for it. Can we now possibly look forward to the investigation, punishment, chastisement and humiliation of the bankers?
And yeah, to agree with others here.
These guys want part of the ‘value added’ by their services. And as others pointed out, that value was in many respects illusory.
From their point of view, individually, it wasn’t. They didn’t individually consider themselves to be destroying the economy. In the environment in which they were operating (rising house prices, profits, share values, abundant money) their decisions appeared rational to them.
Are they incredibly selfish and frankly, ugly to take bonuses after all that has happened? Yes.
“most of them were doing what they believed would maximise profits at the time, and it was a culture where had they not done so, in many cases they would have been replaced.”
Sure. But that’s not really an argument that they were morally justified in what they were doing. An extortionist could make the same claim, with equal reason and equal moral weight.
I’m not saying it wasn’t horrific to accept their bonus payments after their companies made vast losses, in fact I specifically said it was ugly.
I’m just pointing out that when individually rational decisions lead to a negative aggregate outcome, only the government can do something about it (or another very powerful policing organisation).
The individuals concerned were mostly blind to the larger realities, and justified their . . good fortune, in a manner which made sense to them. I’m not vindicating them of immense greed, just saying I wouldn’t place a lot of weight on their individual decisions.
You mention extortion. To take a point from the criminal law though, there is an element of intent, there is mens rea. As I say, I don’t think very many of these guys went to work in the morning thinking: I’m really going to screw over the poor today.
Indeed, most of them thought they were doing a good job.
Hell, actually, I’ll just give up on that argument.
I don’t much want to spend my time ‘defending’ these guys. In any sense of the word.
Heh.
Yeah, I know – I just think they’re in an irresponsible and distorted business, that’s all, but it looks as if you don’t disagree much.
This isn’t just a crisis-born view, for what that’s worth; I’ve thought the incentives and thinking of investment types were fucked up for a long time. Winner-take-all society kind of thing.
Simon:”And you’re right, they should have seen that and reformed their practices.”
Simon, do you think the (rejected) US Government bids to increase legislative oversight of the institutions could have prevented the damage?
Personally, not being a serious economist my view is that it would not have prevented the damage. (that doesn’t mean it wouldn’t have mitigated the damage)
The economic crisis, to me, arose on multiple levels and multiple fronts and not merely from bad investment decisions.
It was a natural consequence of the market system in operation at the time (and still in operation). They top layers helped spread the risk, reduce the perception of the risk and ineluctably left a vacuum which swiftly filled itself (nature abhoring a vacuum after all) with still more risk. By this transpirational pull you get some wonderful foliage.
Like I say, my view is not very helpful considering my lack of qualifications and knowledge.
Dave, my comment was premised on the assumption that financial institutions have an actual useful economic role and therefore contribute to wealth creation. OK, maybe I was was being too easy on them – but that’s a cheap shot.
Of course the problem is that they’re creating ‘wealth’ ex nihilo and when the bubble bursts it goes back to the nihilo it came from, as you nicely put it.
But the problem I was hinting at (in my perhaps overly-cryptic way) is how to create a system, and a culture within that system, which operates on wealth rather than ‘wealth’ and where do you start. Better regulation, of course, but we still need to replace the tequila-sippers with people who understand that they’re simply providing a service.
I appreciate what you say, Francis, but it’s not a cheap shot to observe that market prices depend on buyer confidence. There is no wealth that is not ‘wealth’ in your sense; and this applies even to basic commodities. A well-built house can become worthless in moments if the next-door house collapses into a sinkhole. A glut of grain [or a contamination-scare] can crash the price of bread. Milk has no value to the lactose-intolerant. Diamonds are cheap when you’re bargaining for your life…
The problem comes when we are told, year on year, that GDP is rising, when most of the rise turns out to be, as Greenspan so memorably put it, irrational exuberance.
Surely you’re mixing terms there, Dave – worth is one thing and price is another. A glut can crash prices but food can never be actually worthless.
Yes it can. If I told you there was a 10% chance this bar of chocolate had cyanide in it, would YOU buy it? My point was about buyer confidence. I may be sure my own personal chocolate is fine and dandy, but people may not want to take the chance. And without willing buyers, there is no economy.
Now, if you want to build a society without an economy, good luck with that. Even the USSR never managed to work without money, though they tried [satirically, at least, as in “they pretend to pay us, and we pretend to work”].
Nice gentle musings, a la Francis above, about how it would be nice if we could all just get along without market relations and the excesses they create have to stop dead at the point where you notice that the only actual alternatives are a state-led command economy, or a system so simple it amounts to village autarky – loads of bread [in a good year] but no travel, no medicine, no art, no literature…
Social democracy, in its various forms, is a way of moderating market excesses, and works fairly well in the EU. But it won’t, can’t and has never claimed to do away with capitalism. There are as many ‘fat cats’ in France as in the UK, they just keep slightly quieter about their excesses. But the excesses are the price of a system that generates enough ‘wealth’ to ensure that we don’t all have to share the lifestyle of a medieval peasant.
No no – I have no plans to try to build a society without an economy. I’m well aware of everyone’s dependency on buyer confidence. I was just making, or trying to make, a narrow point – basically that food isn’t a fantasy ‘value’ like the putative value of paintings and the like, or a social value like money.
The excesses are actually extremely variable. If you want to measure relative inequality of income or wealth, or specific forms of compensation vs median compensation then you get very different numbers in different places.
Systems of ownership and property ‘rights’ and the structure of relations within a system can vary substantially. I’m not at all convinced that excesses (viewed by many economists as neither an efficient nor desirable outcome) are necessary to create wealth sufficient to elevate us above peasantry.
Depends what you call ‘excesses’, I guess. There are an awful lot of people in China with a higher standard of living than mine, and that’s OK with the Communist Party [perhaps because quite a lot of them are in it?]
You can play around with niche examples – Sweden is always a good one. But you have to factor in 400 years of social cohesion and Lutheran scorn for ostentation…
I don’t want to draw this thing out but I certainly never suggested that we could get along without ‘market relations’. I explicitly acknowledged the useful economic role of financial institution. The ‘cheap shot’ was suggesting that that acknowledgement was being too easy on them.
As for the distinction between ‘wealth’ and wealth I’ll take on board OB’s suggestion and make a distinction between ‘wealth’ and fantasy ‘value’. But being reality-based I’m still going to insist that the difference is that the former more or less corresponds to some meaningful concept of wealth and the latter doesn’t (which I take it is in essence of OB’s narrow point).