"Capitalism's Enemies Within"

Robert Samuelson says there's something wrong with the markets that determine pay on Wall Street that causes pay to be too high and encourages excessive risk-taking:

Capitalism's Enemies Within, by Robert J. Samuelson, Commentary, Washington Post: Amid the mayhem on world financial markets, it is becoming clear that capitalism's most dangerous enemies are capitalists. No one can have watched the "subprime mortgage" debacle without noticing the absurd contrast between the magnitude of the failure and the lavish rewards heaped on those who presided over it. At Merrill Lynch and Citigroup, large losses on subprime securities cost chief executives their jobs -- and they left with multimillion-dollar pay packages. Stanley O'Neal, the ex-head of Merrill, received an estimated $161 million.

Everyday Americans will conclude (rightly) that this brand of capitalism is rigged in favor of the privileged few. ... If you leave your company a shambles -- with losses to be absorbed by lower-level employees, some of whom will be fired, and shareholders -- do you deserve a gold-plated send-off? Still, the more serious problem transcends the high pay itself and goes to the wider consequences for the economy.

Wall Street's pay practices perversely encourage extreme risk-taking that can destabilize the economy. Subprime mortgage losses may simply be chapter one. ... If banks and investment houses sustain more losses, the nation's credit system will be further wounded and so will the economy. ...

By "Wall Street," I mean all the commercial banks, investment banks, mutual funds, hedge funds and the like..., but particularly investment banks. Pay is eye-popping. In 2007, Lloyd Blankfein, chief executive of Goldman Sachs, received compensation estimated at $68 million. ... Just why investment bankers and traders out-earn, say, doctors or computer engineers is a question I've never heard convincingly answered. Are they smarter? Unlikely. Do they contribute more to the economy? Questionable. True, Wall Street often performs a vital function. ...

But Wall Street also frequently misallocates capital and credit. The "tech bubble" of the late 1990s was one episode. Now we have subprime mortgages. Why? Well, the herd mentality of financial crazes has a long history. But compensation practices skewed so heavily toward bonuses based on annual profits make matters worse. ...

To be fair, the real estate bubble had many causes, including low interest rates, the political popularity of homeownership and the (mistaken) belief that housing prices could never fall. This may explain why, so far, the backlash against Wall Street has been muted.

But if the subprime failure turns out to be a preamble to a larger financial breakdown, flowing from the creation of new securities that offered short-term trading possibilities but whose long-run risks were underestimated, then the mood could turn uglier. Indeed, many Americans may conclude that capitalism has run amok.

When I hear about inequality widening, the ultimatum game experiments where people are willing to do things that do not appear to be in their economic interest in order to punish unfairness sometimes come to mind. There is some tipping point - I don't know where it is - but there does come a point where the perception of unfairness causes people to demand change, and they may be willing to do things that appear to be economically irrational in order to bring that change about. Often, it is the threat of taking action, not the action itself, that promotes changes that reduce inequality. On a smaller scale, we see this when workers go out on strike and appear willing to pay a far higher cost than any gain they might eventually reap in order to ensure that pay is fair according to their perceptions of what fair means. And often the threat of a strike is enough to change the outcome of negotiations over who gets what share of the profits, the strike itself is not necessary.

Was the Great Depression such an event, a time where people came to believe that the system did not treat the typical household fairly, and thus demanded change? Some of the policies that came out of the Great Depression to alleviate inequality may have been an attempt to stave off more drastic change - it was either give in to the demand for a reduction in inequality within the capitalist system itself or, some feared anyway, face the possibility the capitalist system itself would be fundamentally altered or even replaced.

If we have a hard landing, a true hard landing where significant numbers of people are thrown out of work for a substantial period of time while those who were rewarded in recent years do not face similar hardship, will that trigger change? I think it might, though it's not exactly comfortable to think that something like universal health care has a better chance of being enacted if we have a severe recession that causes people to demand change, any change that benefits the working class, than if times remain relatively good. But hopefully I'm wrong about that and we'll get the needed change in healthcare and other areas without having to suffer through a long, deep, recession first.

Comments

[reason]

This needs more bright people looking into it. The pat explainations from oneside and the rather helpless denunciations from the other aren't good enough. Why has a system of compensation developed that is so obviously flawed?

[Real Person from the Real World]

A lot of compensation models are out of whack. Look at all the sales jobs, where people get a liveable base, and then big commissions that encourage them to screw the guy at the receiving end. Sales seems to be the fastest growing job sector. Low pay, but better than Walmart, to get in.... if you have the maturity and stamina to get thru the voice mail.... the promise of big commissions, altho the employer may quibble or another sales guy may steal the commission.... What kind of jobs are these that depend on one person screwing someone else?

Also, irrationality takes a good part in decisions. MIT professor Dan Ariely, a behavioral economist has a book comming out: Predictibly Irrational, about irrational decision making.

[James Kroeger]

Yes, Mark, if we see a complete meltdown of the financial industry, an opportunity would exist to pursue---as John Edwards would call it---transformational change instead of simply incremental change. What kind of change? Well, if our representatives in Washington were to follow a couple of sacred principles in managing this crisis, we would perhaps end up with a banking system that is primarily government owned and managed, and a new era of financial security would be at hand for those who have no choice but to work for a living.

The one principle that we should never give up on is our belief that bad/stupid/inefficient enterprises should fail and fall by the wayside. Those who made bad decisions that put millions of the rest of us at risk, should pay a steep, steep price. Everyone else has to play by the rules, but if bankers get into too much trouble as a result of their risk-taking, and enough of them get into trouble at the same time, they know that they will be able to 'get away with murder' because the politicians in Washington will be easily persuaded that they are simply to big and important for us to let them fail. And so the get a taxpayer bailout, and continuing rewards for enriching themselves at our expense.

What then are we supposed to do? Isn't there anying we can do that would ensure that the captains of the financial industry pay a very steep price for getting us into this mess while at the same time enabling us to go forward in prosperity? The answer is yes. Here's my proposal:

When the moment arrives, when these privately-owned banks are facing bankruptcy, the federal government can step in to buy up the assets of these failed institutions at fire sale prices (hooray for the taxpayer!). These banks would then become government owned and managed banks, banks that would not engage in predatory lending practices because they would not be profit-driven. Other banks that are able to survive the current mess could continue to operate and compete with the government bank. It might be tough for them because the government bank wouldn't have any capitalization issues to deal with. They would provide a service to the public, providing loanable funds within the constraints of the Treasury's money supply goals.

But wouldn't this deprive our society of the great advantages private markets are able to bring us? Not really. What precisely has our privately owned banking system done for us that a state run banking system, like that found in China, would not be able to provide? The answer is nothing. What kind of efficiencies and innovations have private bankers brought to our world? Please, someone, give me a list of the advantages of a privately-owned banking system? The People's Bank of China had given a very long period of strong economic growth for almost three decades without a recession and without hyperinflation, or even 'uncontrollable' inflation. That is something we never have been able to pull off with our crappy, private mess.

It sounds like a very doable option to me...

[Lafayette]

Article: Stanley O'Neal, the ex-head of Merrill, received an estimated $161 million.

Merrill, Lynch is a publicly owned company. As a stockholder, I did not authorize that rip-off of assets (that I partly owned) on behalf of a person who mis-managed the company.

It would seem to me that the trust placed in O'Neal -- to competently manage the company -- was, in fact, misplaced. I should, as part owner of the company, therefore, seek reparation of the prejudice by repayment of the separation fees accorded.

I would also seek damages from the Board that allowed this to happen under its watch. It has (supposedly) the responsibility to look after my vested interests, which it clearly failed to do.

That's worth a nice little court trial for "breach of trust", I should think.

[hari]

Listen! Guys - you're ALL upset with Fed action coming as the market was about to follow Oct'87! May be some of you are right, a meltdown would've done some good and finally gotten rid of the so-called exuberance!

I've a feeling the Fed action was in a way expected but will NOT stop the rot on the subprime, in particular. That will certainly go into 2009 and more...

Chinese capitalism (!?) is something neither you nor I or even Brad Setzer can understand or explain. However, I suggested before - we're on a historical watershed in terms of globalization and its eventual geopolitical impact.

Just imagine what a coup the Chinese can, in fact, claim if they can find ways and means of bridging US capitalism with some of their so-called scientific social contract with the masses...( new platform of the Party!) and secure a more compassionate form of social system.

Don't ask me what it will look or smell like - because I really don't know!

Honestly, like some of you, I'm also in the dark about geopolitical tectonic shift which GWB has with or without
knowing given a big and bold move (against US national interest!).

The invasion and continuing drain on recurrent budget and human resources will finally horn in rampant Supercapitalism!

I'm confident the US electorate are not ignorant of the mess they see on the screen ---it's btw all playing right into HRC hawish personifiction!

[reason]

James Kroeger....
Of the course the danger with publicly owned banks, is corruption (that political connection would dictate lending policy). The answer to that is correct procedures and independent supervision, exactly as it would be with the private sector. No the answer is proper supervision. If the Fed won't do it, we need to find someone that will.

[James Kroeger]

Reason:

Of the course the danger with publicly owned banks, is corruption (that political connection would dictate lending policy).

Corruption? Yeah, I guess we don't see much of that in our privately-owned financial system, do we? I guess the pressure of hot price competition just works that special magic to discourage bankers from manipulating the politicians in Washington to serve their interests.

It's kind of a laughable argument, isn't it Reason? :)

[reason]

No - because with publicly owned banks there is not necessarily an alternative finance source, or any penalty for the culprit (in the private case, the culprit may lose income). I'm not saying you are wrong, I'm just saying the answer is incomplete, you still need to spell out the accountability path. If I weren't making the argument, someone less sympathetic to you would.

[reason]

And as far as manipulating politics is concerned, lets not get cause and effect mixed up. Cleaning up politics is one thing, cleaning up finance is another.

[baileyman]

If the game is to transfer as much of someone else's net worth to MY net worth, why am I "failing" if that's what I do?

[James Kroeger]

...with publicly owned banks there is not necessarily an alternative finance source, or any penalty for the culprit (in the private case, the culprit may lose income).

I'm not sure what the culprit is guilty of in the context you have in mind.

Earlier, you said the concern was that "political connection would dictate lending policy." It seems to me that political connection (finance industry lobbyists) currently dictate lending policy, to our collective detriment.

This is superior to how a state run bank would behave how?

BTW, I appreciate the basic sympathy you've expressed for my various speculations, Reason...

[Ken Houghton]

hari - Down 200+ so far today. There's a decent chance that yeterday may come to resemble Friday, October 14th, 1987.

And speaking strictly for me, I was hoping more that it would be 1989, when the bank I worked for decided not to fund the United LBO and the market recovered quickly.

While the multiplier would have to get down to 12-13x current earnings before I thought of it as a buy, you're welcome to pile in. As with the people who used their inheritance to buy houses over the past few years, I'll hope that you're investing wisely.

I just wouldn't bet that way.

[Tinfoil]

Capitalism's has only one enemy
==================================

The economy runs on "Energy", Reserve Banks must have "Energy Reserves" to be called Reserve Banks, else they are Reserveless Banks!

The moment Reserve Banks has "Energy Reserve" to back currency issue, capitalism will work as it is indented to work. If a Reserve Bank tries to inflate currency the bluff will be called in short time and the bankers will go to jail.

[Patricia Shannon]

Would you trust the Bush administration with control of a national bank?

[reason]

James Kroeger...
I think you are being deliberately(?) obtuse here. Clearly, I was referring to the bank directing SPECIFIC loans, rather than regulation. This is direct corruption, rather than the less direct corruption of the political process you have in America. And forgive me if you it think it naive, but the correct answer to a corrupt political system is to reform the political process, not try to take over all the people taking advantage of that corruption. A nationalised industry controlled by a corrupt government is still corrupt. Clean up the government first.

[reason]

OK, I'm going to make a more general plea here. Is it just me, or do other people here think that neo-classical economics (and my view is dated I studied in the 1970s) has a poor grip on the relationship between the real economy and the financial economy. Somehow, I find the Austrian views on this (no matter how unsupporable some of their other views may be) more satisfying that the neo-classical view. We have seen it in Japan, now we see it in the US, we can create lots of paper wealth, which can vanish in a puff of smoke. And I don't think we have a good model to explain it. Can somebody tell me I'm wrong?

[reason]

James Kroeger...
Can I ask you question? Have you read Jane Jacobs "Systems of Survival"?

I think it has some important and relevant ideas in it. If you haven't do. It is short and fairly repetitive but I think it makes it clear why mixing control functions and commercial functions is bad for the society.

The problem with the Republicans is that they have never learned that what is good a particular business, is not good for the economy in general (since the economy works through the CONFLICT of interests between different businesses). The problem with the Democrats, is that they tend to concentrate so much on what they want to do, that they ignore second order effects.

[Uncle Jeffy]

Mark -

"...But hopefully I'm wrong about that and we'll get the needed change in healthcare and other areas without having to suffer through a long, deep, recession first."

I'm hopeful, too. But I'm a realist as well, and I fear that a recession - of unknown severity and duration - will be necessary if voters are to set aside the fearmongering, slanders, and racism/sexism (if Obama or Hillary Clinton is the Democratic candidate) and vote for the re-establishment of equity in compensation.

[Bob]

Why would you want to change capitalism ?

It's been given so many chances and it still doesn't work.

It needs a bullet to the head and we need to move to the proven system of socialism.

Socialism is doing a much better job of taking care of the people that live under it.

Just one brief example -

The book "Poor Kids In A Rich Country" written by a Harvard prof explains that child poverty is 10 times higher in the US than in some of the socialist countrys in Europe.

Even most of South America has dumped their foolish experiment with the Milton Friedman / raygun form of capitalism after it ravaged them like a swam of locusts.

[esb]

Clearly, what set the entire insanity in motion was the "1% solution" of easy Al Greenspan.

And easier (or easiest) Ben Bernanke is in the process of making AG look like a circumspect, conservative central banker.

Hell, the man makes Arthur Burns and Bill Miller look conservative.

In contrast, the ECB just indicated that it will not follow the US central bank along the twisted road of this new insanity.

The goal of the ECB is to control inflation whereas the goal of the US central bank is to create inflation so as to generate employment.

As I am wont to repeat, the US central bank is a one-trick pony, and the trick is first, last and always the creation of inflation.

[mik]

Merrill, Lynch is a publicly owned company. As a stockholder, I did not authorize that rip-off of assets (that I partly owned) on behalf of a person who mis-managed the company.

You didn't think that as a stockholder -- presumably small -- you have a veto power, did you?

Just as a voter you have no veto power over who becomes prez and whom he appoints as Treas Sec.

Your only power is to try to get enough votes to put your man on the board and hope he will influence a fairer package for the CEO.

Much more interesting question is continued total silence by the big public stockholders, like pension funds and mutual funds, who should be more active on our behalf.

I don't know what the relevant gov regs are, but they are rarely heard from.

[mik]

the US central bank is a one-trick pony, and the trick is first, last and always the creation of inflation.

Brilliant. And how does it explain Volker's Fed Reserve actions in 1981-82?

[Zero]

Real Person from the Real World says...

"A lot of compensation models are out of whack. Look at all the sales jobs, where people get a livable base, and then big commissions that encourage them to screw the guy at the receiving end."

Uh no, the purpose of a livable base is that you don't have to screw the guy at the receiving end.

[Dave Schuler]

A long, deep recession may make universal health care more politically possible but it will make the real reform that's necessary for universal healthcare to be fiscally possible, namely, breaking the cartel that controls the supply of healthcare, much less possible as healthcare suppliers circle the wagons to defend their incomes.

[esb]

mik ...

Volker is the one exception.

The one with the coconut cojones.

[Bob]

One (of many) black marks against capitalism is the way it has turned the US population into degenerates.

A perfect example is that polls have shown close to 70% of the US thinks that the kids of today will be worse off than their parents.

While thats a problem in itself the real problem is nobody is raising any protest against this trend.

You can find animals that protect their young better than that.

Even the French went wild and rioted a few years back when the elites made attempts to lower the pay of the French youth.

[James Kroeger]

Reason...I was not aware that my comments/perspective could be interpreted as obtuse. Not my intention.

And forgive me if you it think it naive, but the correct answer to a corrupt political system is to reform the political process, not try to take over all the people taking advantage of that corruption.

I generally agree. I never bought into the simplistic Marxist view that all you have to do is take over control of economic institutions and everyone will live happily ever after. I love to see competitive markets produce commodities and many consumer good/services, but when markets do not perform in a way that provides us with all those economic benefits (low costs, innovation, etc.) because there really isn't any price competition (like in the health care industry), there simply isn't any justification, IMO, for not relying on state control.

Yes, of course, a government-owned/managed industry must be zealously watched over with various oversight efficiency-enhancing initiatives. If I were President, for example, I would create an agency that combined the duties of an 'inspector general' with the advice/instruction of a team of efficiency consultants. These government agents would randomly visit every agency of the federal government, studying their operations, make recommendations, and reporting back to the President. They would check the books and spending decisions and resource allocations of every department.)

I'm also in favor of creating an organizational culture where responsibility for the legal/moral operation of a department is not entrusted to any individual executive. We need an organizational environment where all decisions makers have other people looking over their shoulders, in such a way that they are not tempted to exploit their 'mandate' in order to serve their own ends. Competition is not the only incentive that can inspire people to improve efficiency, lower costs, and avoid corruption.

I'd really, really like to hear someone explain what great benefits our private banking industry has given us that a government-run banking system would not be able to provide.

[cm]

reason: I'm afraid that in part, financialization of an economy is just an institutional expression of the general human trend to convert productivity increases into slacking opportunities (not necessarily slacking of those whose charter it is to do the work). How much participation in financial markets is motivated by the participants' desire to avoid working on some factory floor or in some workshop/cubicle?

Of course I'm not suggesting that no work is being done in the financial sector, far from it. Carrying out any economic activity requires labor.

And up to a certain point, a financial system is needed to "grease the wheels" of the "real" economy. But I think we are way beyond that point.

[bakho]

I think PK had the best explanation of this behavior:

http://web.mit.edu/krugman/www/iceage.html

"Me want mammoth meat."

Like buying lottery tickets investors are willing to chance that their bet will pay off. It is only when the investments go south that investors argue that the compensation is too high.

[bob mcmanus]

Tax 'em blind. Universal health care will be great, but they will seek to fund it out of middle-lass wages.

Back to the 50s. Marginal tax rates of all kinds of income at 90%. Nobody needs to be a billionaire. Yes, disincentives to get filthy stinking rich may reduce creativity, although the guy who invented the IC was just a proud drudge, but we need disincentives to excessive risk-taking and short-term gain.

Where will the money go? The voters will decide, but I don't really care. Versailles and the Louvre are really neat. High craft jobs, shared commons.

Everything will fall into place if you attack wealth. Tax them.

[esb]

Three cheers (or four) for the ECB's comments expressing a thinly-vieled contempt for the US central bank's use of inflation to generate employment.

Real central bankers, not shills.

[Winslow R.]

mik wrote: "Brilliant. And how does it explain Volker's Fed Reserve actions in 1981-82?"

esb wrote: "mik ...

Volker is the one exception.

The one with the coconut cojones."

Catch a clue. Volker had 20% short term rates (due to inflation) with plenty of room from the zero bound to revive an economy he took into near depression. This broad misinterpretation of economic history needs to be buried once and for all.

Volker took office at an 'opportune time'.

Bernanke is not near so lucky.

says...

"Some of the policies that came out of the Great Depression to alleviate inequality may have been an attempt to stave off more drastic change - it was either give in to the demand for a reduction in inequality within the capitalist system itself or, some feared anyway, face the possibility the capitalist system itself would be fundamentally altered or even replaced."

Of course. Historically, reform has always been a result of fear. Bismarck introduced Social Security in the late 19th century because he was scared of a socialist revolution. The welfare states in Western Europe after WWII were developed because the elites were worried people might find the socilaist model too appealing. Conversely, the neoliberal backlash of the last decades was a result of the weakness and ultimate demise of the Socialist block. Since 1990, capitalist elites felt they didn't need to compromise any more. They didn't have to make any concessions to workers any more in order to keep them from revolting. They didn't have to share the wealth any more, not even symbolically. Reform will only come about when the elites feel threatened once again. Which will certainly happen sometime in the near future. The class war isn't over.

[piglet]

My post.

[save_the_rustbelt]

One of the major problems with accounting is that we have to cut up economic activities into years, in order to have some means of preparing financial statements that are comparable and timely.

Economic activity is not so tidy.

Wall Street executives took huge bonuses for 2006 because the accounting activity indicated huge incomes. The tax system also forces an annual reckoning.

Problem is, when the world falls apart in 2007, set up by actions in previous years, there is no easy mechanism for "take backs."

Very difficult to fix - no easy answers.

[mik]

investors are willing to chance that their bet will pay off. It is only when the investments go south that investors argue that the compensation is too high.

Must not be reading too much news, are you?

Subject of outrageous exec compensation comes often enough, there are book(s) written about it.

When a greedy shmuck grabs 100-500M in compensation in a single year, well, that is often a significant part of a company profit that year.

It means that exec compensation package materially affects stock price by increasing PE.

Discussing Marxist ideas for what to do is not very productive.

What is more interesting why big public investors largely keep total silence on the subject of exec compensation.
Isn't it their fuduciary responsibility to raise a stink?

Another interesting question is why we don't see class action lawsuits against excessive exec compensation?
I suspect that laws are written in such a way that make it very difficult to sue companies and execs for that, but I don't know.

Anyone knows about these issues?

[Lafayette]

reason: Cleaning up politics is one thing, cleaning up finance is another.

Money doesn't talk, it shouts

I wish I could be sure of that, but I cannot. The funding finding its way into the political system, by means of candidate electioneering funding, does not smack of pure democratic philanthropy.

How often has BigFinance yelled, "Let us regulate ourselves! We can do it better!" Yeah, right.

We know fairly well that BigOil contributed 50M-bucks to the Bush/Cheney campaign for reasons that became obvious subsequent to the first election and even more so after the second.

With a 19G-buck bonus pool having been shared out at Goldman Sachs some of it must be making its way into election coffers ... and with strings tied.

The plutocrats are trying to maintain their privileges, I fear.

Money doesn't talk, it shouts.

[Winslow R.]

str wrote: "Wall Street executives took huge bonuses for 2006 because the accounting activity indicated huge incomes. The tax system also forces an annual reckoning. "

Too simplistic of an answer.

Wall Street executives take huge bonuses because there are huge amounts of cash generated when leverage bets run the right direction.

Why are leveraged bets concentrated by law?

[mik]

Where will the money go? The voters will decide, but I don't really care. Versailles and the Louvre are really neat. High craft jobs, shared commons.

Everything will fall into place if you attack wealth. Tax them.

If you objective is to screw oligarchs, why not do it directly?

How about nationalizing their property, sending adults to prison labor camps and kids to re-education schools?

Neat and elegant solution.

Was tried many times. Usually did not work, but there is no reason it will not work this time as we know so much more about economics and human behaviour.

[dirtyal]

If we wait long enough, Bernanke's successor can get out the Volcker playbook and jack up interest rates to 20%. First, though, we have to "reflate" (do you like that expression, it was used a lot during Margaret Thatcher's time in the UK) to the point where all our long-term debt is worth a lot less than it is now. That's the hidden agenda in Washington. Pay off the trillions of dollars the government owes with dollars that are worth less than 25% of what they were worth when they were borrowed.

Then, when nobody will buy the debt, someone like Volcker can come in, jack up interest rates, freeze the economy, and bring inflation back "under control".

Pretty perverse, no?

[Holly W.]

Pay is eye-popping. In 2007, Lloyd Blankfein, chief executive of Goldman Sachs, received compensation estimated at $68 million. That's all? The Boston Globe reported that local hedge fund manager Jim Pallotta "earned" $200 million in 2005.

The question to me is, why does trading money around entitle people to such huge cuts of it? Skimming even a small percentage from each account or transaction at financial firms adds up to huge amounts of cash, especially in the recent heady days of the 'savings glut'. It seems to me that there's an argument in this for setting a dollar cap on such fees, but I'm not sure how it would be instituted or enforced.

But to argue that these guys aren't "worth" every penny of their humongous pay or bonus checks -- well, that's just class warfare!

Perhaps in the future we can arrange for everyone in the US to work in the financial services industry for a year and collect a one-time large bonus which would then be invested in an untouchable retirement fund. This could solve the problem of how to pay for Social Security and increase American savings in one fell swoop. And of course I'm just kidding!

[Lafayette]

Bob: While thats a problem in itself the real problem is nobody is raising any protest against this trend.

A caricature of the American Way

That would be ascribing to the American body-politic an intelligence it does not have.

The dumbing-down of America is almost complete, it is so pervasive. People can't think beyond the end of the month and their own particular situation.

Which is why unions have no national voice, since they are sectorally contained. Which is why a class-action suit takes a decade to organize and get to trial. Which is why the pap you see on TV has nothing to do with substance and most to do with image. (Like selling six-pack beer.)

I admire the French who descend into the streets whenever a government does something they don't like. It is the ONLY Public Expression that really taunts the powers-that-be to provoke a "heads-up". But, I doubt Americans have even the gumption to tear themselves away from the TV -- which has become a caricature of the American Way.

All the rest is just mediatic bla-bla-bla.

PS: It is perhaps appropriate to recall Martin Luther King's inspired March on Washington culminating with his "I have a dream ... " speech before the Lincoln Memorial. THAT got them thinking ... !

[Winslow R.]

dirtyal wrote :"Pretty perverse, no?"

It is perverse VolkerI and VolkerII will be proclaimed heroes in perpetuity while Bernanke will be damned.

Holly brought up the difference in earnings of managers of mutual funds and hedge funds.

Mutual Fund managers earn % of funds managed.

Hedge Fund managers earn % of funds managed plus % of return on leveraged bets.

You won't see too many Mutual Fund managers earning more than top CEO's.

Hedge Funds use leverage to amplify returns. They have access to leverage through their close ties to banks (they are often one in the same).

This is the 'core' of the problem people!

[BJ Feng]

Hedge funds are entered into voluntarily, no one forces anyone to accept the conditions of entry! I, for one, would never place my money with a hedge fund, I'm quite satisfied with my index funds, but those who do know the fees they have to pay.

Of course hedge funds have an incentive to shoot the lights out. It's a heads I win, tails you lose situation for them. But if idiots are willing to give money to managers for a good gamble, then oh well. No, these aren't the usual idiots either, these are wealthy individuals and government entities as well as pension plans like CALPERGS which recently increased their hedge fund allocation. So much for the myth that government is wiser and more cautious.

[Bruce Wilder]

mlk: "Much more interesting question is continued total silence by the big public stockholders, like pension funds and mutual funds, who should be more active on our behalf.

"I don't know what the relevant gov regs are, but they are rarely heard from."

Exactly. You don't know the "relevant gov regs" and, apparently, almost no one else does, either.

The corporate executive class, which dominates the Republican Party and heavily influences the Democrats with campaign contributions, has been busily modifying the rules, to favor near-total domination by CEOs.

The kind of takeovers, which characterized the 1970's and 1980's are impossible, now.

And, the giant pension funds and trusts, which should be exercising authority are hamstrung.

The devil is in the details, they say.

[Winslow R.]

BJ Feng wrote: "Hedge funds are entered into voluntarily, no one forces anyone to accept the conditions of entry! "

You are correct but miss the forest for the trees.

Can YOU voluntarily start a hedge fund? Can YOU access fed funds at 3.5% to leverage 33x on corporate debt paying 10%?

There are laws against YOU doing these things.

Why?

[James Kroeger]

...these are wealthy individuals and government entities as well as pension plans like CALPERGS which recently increased their hedge fund allocation. So much for the myth that government is wiser and more cautious.

It's not that people working in the government are by their very nature wiser or more cautious.

The difference is that those who work for the government ultimately answer to voters, the media, and the opposition party.

Hedge fund managers, on the other hand, answer to...hmmm...who do they answer to?

The marketplace?

The 'competition?'

Hahahahahaha!!!

[billy]

Hedge Funds use leverage to amplify returns. They have access to leverage through their close ties to banks (they are often one in the same).

They get easy credit _first_ and buy up all the assets in sight.

The middle-class schmuck is buying this overpriced assets with his hard-earned labour, off the hands of the hedgies, through his 401K and pensions.

The hedgies cash out first and buy real assets with the money, pre-inflation. And the poor schmuck wil be screwed by inflation. With his overpriced asset with -ve real returns. The inflation wanted by whom? Why, the other middle-class schmucks who have paper gains, and dont want to see them disappear.

That's the deal with bubbles and busts. And it's the same deal with bubbles and inflation-to-clean-up-bubble. Those who get the money first win. The ignorant masses see vast nominal returns and zero real returns, but how many understand real and nominal when renting-is-throwing-away-money milieu?

And who wants to see these asset prices maintained - The aging middle class boomers - who suddenly found themselves paper rich, and don't want to see their free wealth disappear. They already borrowed against and spent most of it, or lived far beyond their means and dont have any other savings.

Don't spend on your hard labour to bail out the boomers and hedgies. Don't buy their overpriced assets.

[anne]

BJ Feng has cleverly raised an issue of considerable importance.

There is a sustained lack of price competition among financial companies here and internationally that has long been a puzzle. Coupled with an absence of price competion, even though well priced financial products are always available, at least here, is a lack of reasonable or moderate transparency in important financial sectors.

[Fred]

>The kind of takeovers, which characterized the 1970's and 1980's are impossible, now. And, the giant pension funds and trusts, which should be exercising authority are hamstrung.

There is also the option of an old-fashioned proxy war. If the shareholders are too lazy and irresponsible to do this, then screw 'em. Once the shareholders start losing a hell of a lot of money, which should happen real soon, I predict this laziness and irresponsibility will be replaced by anger. And this anger should eventually result in activist shareholders who set up different compensation schemes. For example, payment in shares held in trust rather than options, with limits on selling these shares held in trust until 5 years after leaving the company.

[bob mcmanus]

Volcker II in 2010 without wage inflation or unions will be an absolute nightmare for workers. We could see Mark Thoma's Bastille scenario. Volcker II would necessitate massive social safety net spending. Deficit spending? Trillion dollar deficits & 3 dollar Euro and a few more points added to rates? Are you kidding?

FDR very early raised tax rates, as in part a confidence-building move, so that the country could see the Fed gov't had some options and to show the workers they weren't being abandoned.

The fist thing a Dem President should do in 2009 is propose a huge tax increase. Reassure int'l markets about fiscal responsibility. I cannot imagine a sane political economy in the next administration without one. Start that conversation, that tax battle now.

There will not be a "Peace dividend" for years, and initially pulling out of Iraq will be contractionary.

[Lafayette]

JK: The difference is that those who work for the government ultimately answer to voters, the media, and the opposition party.

I doubt anyone at the Fed really, truly thinks they answer to the voter. The Fed Chairman barely answers to the PotUS. And, his economic advisors cliquishly answer only to themselves.

The Fed is an entity unto itself and perhaps should be, in order to maintain complete independence from the Executive Branch. But, the risk is one of developing a Bunker Mentality (= an attitude of extreme defensiveness and self-justification based on an often exaggerated sense of being under persistent attack from others; namely the press)

The Europeans are just getting around to this notion of Central Bank independence, after decades of having their Central Bankers kowtow to every profligate whimsy of the incumbent Political Leader to get reelected.

And, we see this happening again today. The Socialists in France are howling that the BCE Chairman Trichet has decided to fight inflation instead of lower interest rates. Of course, if he did, economies would get a jolt, prices would rise and some other people would be clamoring for stricter controls.

Ya caint plize evrawhun.

[James Kroeger]

The fist thing a Dem President should do in 2009 is propose a huge tax increase.

Yes, Bob, yes! Why? In order to stimulate the economy.

Contrary to Republican economic mythology (which many, if not most, Democrat economists also accept without questioning) the increasing of tax rates produces a pure economic stimulus; the more exclusively the tax targets the wealthiest households in America, the more stimulative the tax hike will be. This is because new taxes---if they are levied on the wealthiest households---take money that had been (or would have been) removed from the economy and immediately inject it into the income-spending stream. That is a direct economic stimulus. The only time a tax hike does not create an economic stimulus is when the new taxes collected are raised solely through what is [effectively] a consumption tax. When that happens, there is neither an increase nor a decrease in aggregate spending, for the decrease in consumption spending exactly matches the increase in government spending.

Tax cuts by themselves cannot produce a net economic stimulus. This is because a tax cut by itself must necessarily be accompanied by a reduction in government spending. Governments cannot spend money that they do not have, so any time a government reduces the amount of taxes it collects, it is automatically depriving itself of the money it needs to continue spending as it had. Unless something else is done a tax cut automatically forces the government to reduce its spending.

The 'something else' that usually enables governments to continue spending is called borrowing. When governments borrow money, the economic result is always the same: strong, direct economic stimulus. This is because money that had been taken out of the economy (saved) is then spent by the government. In contrast, an income tax cut by itself takes money that would have been spent by the government and gives at least some of it to savers who will remove a portion of the money from the economy. The decrease in government spending would therefore be greater than the increase in consumption spending, and the result is a decline in GDP, all else equal.

The only time an income tax cut by itself is not contractionary is when all those receiving a tax cut go out and spend all of it. When that happens, the decrease in government spending is exactly matched by the size of the increase in consumer spending. And when that happens, the effect of the tax cut is neither expansionary nor contractionary for there is no change in total spending. That's the best you can hope for if your plan is to cut taxes and pay for them with spending cuts. Listening John McCain?

Of course, when you combine an expansionary tool of fiscal policy---borrowing---with a contractionary tool of fiscal policy---cutting taxes---, the net result is usually expansionary, but such a 'package' would provide a far, far weaker stimulus than the government would be able to produce if it just borrowed money and spent it (or maybe used the borrowed funds to send a free money gift in the form of a check to people who could reasonably be expected to spend ALL of it.) Why oh why do we have to mess with the tax code if all we want to do is send borrowed money to average tax payers? Just send them a check.

[dd]

How is the lack of competition a puzzle? The Gramm-Leach-Bliley Financial Services Modernization Act assured financial industry consolidation and monopolistic conditions in the consolidated financial holding companies. It also assured confusion in regulatory responsibility for insuring investor protection that impacts everything from fees to disclosures. It also created confusion in regulatory oversight for financial products (ie. is a product insurance, a security, a commodity, a depository instrument?) and that helped fuel the rise of unregulated or lightly regulated products (CDO, CDS et. al). The Act also created via all the confusion an opening for a new breed of lightly regulated or unregulated financial entities. Under the Act, the Fed is given "umbrella" regulatory responsibility to sort out the confusion, so perhaps it is ultimately the responsible.
Mr. Paulson's answer is to "streamline" regulatory structures under his aegis. More fees, less competition and no doubt more unregulated products will follow.

[Lafayette]

bmcm: The fist thing a Dem President should do in 2009 is propose a huge tax increase.

Make America a better place

I should hope so.

The art of taxation is not that a government does it, but how. A wise taxation would recuperate the ground lost under Reagan's Wholesale Give-away of marginal tax revenues at the higher levels and augmenting inheritance taxes on the rich as well. It is, after all, unearned income.

This should be done to refill state coffers (after Bush's debacle of having emptied them). Yes, rebuilding America would be a long, slow and costly process. But, it can be done only by recuperating lost taxes on aggregate wealth.

But a New New Deal (various expenditures on reform programs in Health Care, Education, Ecology and Infrastructure) that would set the background for a very high increase (almost confiscatory) on hallucinatory incomes. It would also create jobs, most of which would remain durable, since the mentioned sectors are dislocated with some difficulty.

Such a plan would go over well with the people and if implemented correctly could even work well. It would certainly make America a better place to live.

[paine]

reason
"... I don't think we have a good model
to explain it.
Can somebody tell me I'm wrong?"

your right
but so what

we don't need to know why
we got in
if we now how to get out
and that we do

------------
"The problem with the Republicans
is that they have never learned
that what is good a particular business,
is not good for the economy in general"

to translate ANOTHER MT
the babbits might retort :
there is no "economy in general "
ultimately there are only households and firms

btw
hayek hated macro perspectives

[ddt]

"Another interesting question is why we don't see class action lawsuits against excessive exec compensation?
I suspect that laws are written in such a way that make it very difficult to sue companies and execs for that, but I don't know.

Anyone knows about these issues?"

I work in insurance, and generally these issues fall under a Director's & Officer's Liability policy, which is paid for by the company. So, as a shareholder, if you sue a CEO even personally it is still covered by the company's policy, and the increased premiums will be paid by the company. So basically you will be paid out under an insurance policy that you the shareholder have established to protect the CEO from your own legal recourse. It's a pretty disfunctional system, and I think that is why lawsuits against management are rare, except in cases involving venture capital & failed start-ups where the D&O policy is the only conceivable way for investors to get their money back.

[James Kroeger]

I doubt anyone at the Fed really, truly thinks they answer to the voter.

True, but then again, the members of the Fed Board of Governors do not work for the government, do they? They are paid by the commercial banking industry, the same people who own all the assets of the Fed. That is precisely the problem.

I'm not saying that there is never any reason to worry about a central bank run by the executive branch, but at least, the voters and the opposition party would jump all over the incumbant party if it were to...say...start pursuing a hyperinflation policy. The Chinese have shown us that a state run central bank can manage the money supply in a way that fosters rapid economic growth over a long, long period of time without either cyclical recessions or 'runaway' inflation.

[hari]

Piglet - summarized last four decades of development with passion and relevance.

Laissez-Faire Capitalism time is UP! Mark is right also being a bit more pessimistic after the 75bp cut - but he doesn't know (like we don't) that Fed might go ahead next week or so and cut another 50bp - bring it down to 3%! That's their target on Wall Street...

Now when dealing with BoC and the monopoly of ideology by the Politburo, we've to recognize that competition of ideological predisposition is within confines of the heirachy of the party apparatus - not the market - as such.

That's why China can do things faster than India or any other Asean country.

Yet corruption is supposedly rampant within the Chinese-capitalist class and getting worse because growth averaging at 10% anually is infecting the ideological base of the party apparatus.

I try to follow People's Daily as often as I can...but the last two visitors from UK and India made a big bang in Peking - particularly Indian/PMs speech to Chinese Academy of Sciences.

I wish we could all read that analysis of current globalization perspective, as seen from Asian perspective.
Invariably China-India are coming around to think that they will and can make a dent in global geopolitics monopolized hitherto by US/EU and others.

So, in terms of realpolitik, I suspect a real shift is taking place primarily because after 9/11 US strategy became too simplistic - namely, either "you're with us or against us"!

Asian cultures can't understand that type of jingoism coming from the WH - it embarasses their intelligence of the US and its revolutionary past.

[Bruce Wilder]

Great comments all around.

The crisis of the moment should focus our attention on long-run re-structuring, because the crisis of the moment is a crisis of long-run structure.

We have built a political economy in the U.S. and globally, which is not sustainable. I don't need to list the myriad ways in which this is true. We are on the "wrong track" and most sentient, intelligent people have sensed that throughout the Bush Administration, even if most people can list out the details.

9/11 should have been a wake-up call to a lot of these issues. 9/11 was about oil, about the Middle East and Islam, about the fragility of a globalized, Information Age civilization, about post-Cold War global security.

I suppose one can project whatever you like onto the events of 9/11, but look at what Bush-Cheney projected onto it, and ask a few critical questions, and you see madness and stupidity and short-sighted greed all around.

The U.S. responded to 9/11 by invading a weak and nearly helpless country that had no connection to the events of 9/11. How insane was that? The U.S. declared a "Global War on Terror" -- what a strange and crazed abstraction that was.

It is almost as if Cheney read Paul Kennedy's The Rise and Fall of the Great Powers and determined to accelerate American decline following Kennedy's history as a recipe. Talk about learning from history!

And, here we are witnessing another step in the decline of a Great Power in an historical process, which has been repeated and repeated. Does no one learn?

The Petroleum Economy is entering a period of accelerating decline. I suppose a country that elects two oil company executives to the nation's top offices should not expect better, but . . . enough already.

The Elite we have in charge in the U.S. is greedy, incompetent, stupid and ignorant. And, I suspect that reflects the torpid state of the electorate, the stockholder-ate, the readership, the viewership, and every other mass foundation for the great pyramids of political society.

It is the state of the people, who (re?)elected George W. Bush in 2004. It is the state of people, who elected Joe Lieberman in Connecticut in 2006.

I think Clinton and Obama are acutely aware that it is the state of the People, who will nominate and elect the next President, and are campaigning accordingly: Clinton by promising to go back to the glories (???) of the 1990's, and Obama by promising that we all can just get along (kumbaya!).

I fear that all the strenuous efforts by Bernanke et alia to avert catastrophe will succeed with the result that the impetus to change and avert the real, long-term catastrophe will be fatally postponed. Is that crazy, too?

[dirtyal]

Bruce: Great Post!!

"I fear that all the strenuous efforts by Bernanke et alia to avert catastrophe will succeed with the result that the impetus to change and avert the real, long-term catastrophe will be fatally postponed."

Jeez--I hope you are right! If we can buy some time, we can work toward fixing all the problems on a systematic(?) and deliberate (?) basis. Not the "fatally" part but if your optimism (?) does not pan out, I think we could be in a world of hurt for a long time to come.

[Lafayette]

ddt: So basically you will be paid out under an insurance policy that you the shareholder have established to protect the CEO from your own legal recourse.

Perhaps, but the trial news coverage will cause the person a great deal of misery and any board would have to think twice before hiring them.

Then again, if fraud is proved, the crime is a penal offense and the SOB goes to jail -- regardless of who pays the policy. There's no way they can EVER explain that away.

[James Killus]

Robert Samuelson says there's something wrong with the markets that determine pay on Wall Street that causes pay to be too high and encourages excessive risk-taking...

Mark, I read the entire Samuelson essay, and, to his credit, he never suggests that pay on Wall Street is determined by a "market." You shouldn't either. Pay on Wall Street is determined more or less by the same method that determined the booty of Sir Francis Drake: the number of gold-laden galleons that come within sight during some particular period. The rest is a matter of just keeping the boat afloat as you make off with the swag.

[Bruce Wilder]

JK: "Pay on Wall Street is determined more or less by the same method that determined the booty of Sir Francis Drake: the number of gold-laden galleons that come within sight during some particular period."

Combine this with what Save-the-Rustbelt said about the shortcomings of accrual accounting and you have the beginnings of a unified theory of corporate booty, covering both CEO theft and Hedge Fund Manager theft compensation.

[donna]

"The Petroleum Economy is entering a period of accelerating decline. I suppose a country that elects two oil company executives to the nation's top offices should not expect better, but . . . enough already."

The exact cause of the problem, and the one we have been forewarned about since the 70s. Instead of doing anything to change direction, we went ahead and walked the road to ruin anyway.

"If you do not change direction, you may end up where you are heading." -- Lao Tse

We have had choices for 30 years, and picked the wrong one every time. Those of us who learned to live within our means and did so, who have changed direction and learned to use less energy, turn to alternative resources, and not spent all our money and then some on big houses and fancy cars are now angry at those who did not. They are taking our wealth and tossing it out so they can live large. Why would we not be angry about that?

[joebeerdrinker1776]

It's official, NO Recession in 2008...

the FED has confirmed today though both it's prior inactions and it's recent actions, we're in a DEPRESSION! Yes, they know it, and are hoping against hope we buy the stock turnaround yesterday and today as "proof" that they are in control, but not this time.
What we have before us is the complete collapse of the American financial system brought about by the few at the expense of the many. Yes it is not just the homeowners that are bankrupt, America is bankrupt!

There will be pain and gnashing of teeth as we see the whole system implode before our eyes.
In the past 2 days, the PPT has intervened exactly at the point where a free market would have triggered a substantive slide in prices and initiated the natural cleansing process that would wring out the excesses in the system. But they not only intervened on Tue but again today, in a veiled attempt to convince the markets that all is well. Sadly, it means we are in for one hell of a ride.

I for one, see no option but to abandon the markets and sell every worthless paper asset into the next fake rally which will come, and let Uncle Sam take back all the worthless paper they allowed to be created by the Street. It is becoming clear even to the uninitiated that the housing market will be bad for much, much longer than in any previous period of economic weakness because this time we are looking at real systemic damage with no real easy fix.

The FED can drop worthless paper printed with green ink from 747 jetliners, and it won't help. Who wants to take on debt when they see all the lies that permeated the system from blaming the poor small guy who was just trying to find shelter for his family, to the scads of greedy "investors" that turned a necessity (housing) into a speculative trading vehicle with all it's associated risks, right on up to the very highest levels of our government who are the worst liars of them all. There is no reason at all to believe anything from Wall Street on up to the Whitehouse it's all smoke and mirrors to fool the public, but they are getting wiser to the scam. A legalized ponzi scheme to defraud Americans of their wealth, and export it all to the enemy (AKA 'our trading partners' or 'sovereign wealth funds') ie, the folks who we eagerly exported trillions of dollars to over the last several decades. And it isn't just one party either, this has been going on for way too long!

This time the economic chaos was not caused by external events, it was orchestrated by the willing greediness of the very persons who knew better, but failed to exercise prudence and good judgment in the name of the "gimme more" mentality and prostituting their intellect in the name of politics. The reward for many that are destroying America, $100+M severance packages, and they leave behind failed companies, horrific stock losses and asset devaluations.

Now, those not retiring as multi-millionaires or better yet, cry for government (read you and me the taxpayer) assistance to help them absorb THEIR LOSSES! (No broker I ever dealt with in 40+ yrs. came to my aid when my decision to buy or sell went against me, in fact it wasn't until much later in life that I finally figured out that likely, most of the time the guy selling me the stock was MY BROKER, who either sold short against me or later shorted the stock to drive the price down so he could clear his book at a profit. We should encourage deceit and chicanery with financial assistance? The only assistance I think they deserve, is assistance out of their white collar jobs and into the debtors prison, striped penniless of all their ill gotten gains!

As to housing, ML recently stated that housing will likely fall at least 30% in the next 3 yrs, and I believe this is too conservative. Already, I saw areas where fully rehabed SFR properties have been marked down 70% and there are still no takers. It will take time to 'bubble-up' to the prime housing markets, but it will, as it has in the past.

If you look at a curve of housing pricing you can see the 'hockey stick' ramp-up in housing over the last 7+ yrs, and anyone who knows about exponential curves realizes that we are way outside the 3 sigma band here. Yes, 50% may be to low, given the vast scope of the problems at hand. Even today, I saw ads for buyers of 'bulk' REO's in the tens of millions and even into the trillions, YES TRILLIONS! for bulk buyers of all property related assets.

This ain't going to be pretty, and it ain't going to be over soon. So, I suggest you do whatever you will, but I fully intend to hunker down, sell all paper assets including gold stocks Why?, because anything with derivatives on it can be manipulated by those with the deepest pockets, this of course includes the indexes, individual stocks, commodities, CDO's, MBS's, SIV's etc., if they hadn't created these RPG's/WMD's of leveraged instruments they wouldn't have had enough cash to manipulate the markets/economy as they did, and now that its broken...Game Over!.

The American political system is just as broken as the financial system, it needs to be purged and soon. I for one will not vote for either a Democrat or a Republican, as they are cut from the same cheesy cloth, it's just a matter of who owns them via the PAC's and campaign contributors and who they choose to give the wealth to that they steal from the citizens.

We need a new third party, with men of integrity and moral fiber, with vision and the capacity to solve extremely difficult and complex problems. You can see that the 2-party system has been successful only at distorting the intent of the founding fathers, and of late we have proof that even just one branch of the government can wrestle complete control away from the other branches buy stuffing his cronies in high places like the Judicial branch.

The good news is out of all this greed and destruction to the financial system there will come a new party that will serve the nation and it's majority, not it's wealthy minority, who have scammed their wealth off the sweat and backs of American workers, and systematically turned the USA into a potential 3rd world country. We are better than that and we will not stand for anything less that regaining the true potential that is the birthright of America. If there are any honest politicans left in Congress, you are urged to impeach Bush now, immediately, before he starts/declares another war, and uses the war powers act to keep himself in office and throws the US into the abyss.

Please use your critical thinking skills and see what is clearly before you, and perhaps we can mend the damage before it is past the point of no return...but I doubt it, it seems so surreal even to me.

Good luck to you all!

[esb]

Lafayette ...

In one of your earlier posts on this thread you make reference to the expression, "New New Deal."

I am curious regarding whether you knew when you wrote this of the focus group testing going on this week by one of the campaigns (I will leave it to the rest of you to guess which one) on the potential impact of those words on different voting subgroups.

If so, and if you have some connection over there (or even if you do not) and care to comment here, can you imagine the intensity of a fall campaign in which one of the contenders asserts the need for such a "New New Deal?"

This would be nothing short of a high-stakes attempt to make the leap onto Mount Rushmore.

[billy]

http://biz.yahoo.com/ap/080123/economic_stimulus_business_boon.html?.v=1

Government going to use Tax payers money to bail out the builders and banks. More bonuses for the CEOs and financial industry pigmen.

Under the proposal, one of several emergency tax breaks being considered for corporate America, companies would for two years be allowed to carry back losses incurred in 2007 and 2008 against profits accrued over the previous five years, instead of the usual two year timeframe.

Some of the biggest beneficiaries would be Wall Street banks such as Citigroup Inc., Merrill Lynch & Co., Morgan Stanley and Bear Stearns Cos. Homebuilders, which have been punched by the housing slump after years of go-go profits, also stand to benefit. In fact, any company that is now struggling following years of healthy profits (that pumped up their tax bills) could in theory benefit.

[JPGanMor]

James Kroeger's comments are dangerously naive. Profit motive ins't the only motive out there. Know-it-all bureaucrats have certainly played there role in this and other fiascos. One common problem in urban areas are public rehab "loans" that do not require payment if a person stays in the house. All good, until the administrator denies the borrower a subordination of the rehab loan to a refinance of her ARM.

My point is, this is not an easy issue to deal with and that there are other dangerous motivations in addition to profit.

[hank]

Look where the leverage is.

Have you ever stepped on a rake that someone left out in the yard and had it come up and whack you? Think about it.

http://www.youtube.com/watch?v=woIkIph5xcU

The L-Curve: A Graph of the US Income Distribution Graphically describes and criticizes income distribution in the United States.

www.lcurve.org/

[me again]

'New New Deal' does turn up some interesting hits over the past years in Google and in Google Scholar, for example this:

Aspen Symposium 2005
".... I propose a new New Deal. ...
http://www.educause.edu/ir/library/pdf/ffp06W.pdf

--- excerpt ----

... I urge adoption of a principle of justice from a “picture window view” of Rawls’s original position, and ask what kind of world, in the broad picture, we would like to live in if we could choose before we were born, assuming we had an equal probability of being born as anyone. We are thus concerned about all
people’s lives, not just those of the poorest. ... income inequality, rather than being automatically a bad thing in moderation, becomes an aspect of the picture window view. We will tolerate substantial income inequality. What we surely do not want is gratuitous, random, and painful inequality. Rawls’s theory of justice is important to my argument because it shows that the intuitive sense that many philosophers have had about achieving justice is in fact amenable to an application of financial theory. My aim is to broaden the scope of this financial theory to relate it more deeply to society at large....

[Jenna's Bush]

Hell must be freezing over. I agree with Samuelson.

[dd]

"But hopefully I'm wrong about that and we'll get the needed change in healthcare and other areas without having to suffer through a long, deep, recession first."

I don't see a path to healthcare without a change in banking and finance as the insurance industry (including derivatives) is a major backstop in the current consolidated financial structure. If changes in healthcare are instituted without financial reform then the only path is mandated insurance and the dwindle down of Medicare with "supplemental" insurance.

[skeptonomist]

It probably will take a catastrophe to produce reform in many areas. Politicians operate on the time scale of the next election, and they generally cannot afford to do anything which is clearly beneficial in the long run, but causes any harm or reduction of gain in the short run, either to their own constituents or to big-money donors. The Great Depression produced such massive discontent that it led to the New Deal and significant lasting change in many institutions. True revolutions have seldom occurred in Anglo-Saxon societies.

For once I can agree with something Samuelson says, but he does not discuss the reasons for the growing inequality. I think deregulation (chipping away at the New Deal) and lack of progressive taxation must play a role. Marginal tax rates, when capital gains and dividends are included, are not distinctly progressive. The incentive could be shifted away from huge short-terms gains, for example by making capital gains taxes more time-dependent (366 days is not short-term), and indexing for inflation. If an executive can make a fortune (that is, some millions, not billions) in 20 years, that is enough incentive.

[skeptonomist]

Marginal tax rates are not *now* progressive, and 366 days is not *long* term (why doesn't spellcheck know that?)

[Worker]

The banks and their minions are a bunch of obnoxious spoiled children in need of adult supervision. The financial sector is clearly not by any stretch of the imagination a free market since they coming begging for gubmint intervention every time one of the bubbles they created predictably bursts. This demands strong regulation of their leverage, including the off-balance sheet sham "innovations" they use to juice their returns.

Their bonus system is part of this problem. But what is the solution? Maybe if you want 20/1 leverage, a la a depository institution you need to compensate based on a 5 year escrow tied to what you underwrite or trade. This is difficult because of the unnecessary complexity that has turned banks into casinos.

Red bob and the other class warriors forget that during the New Deal the rich just moved their money to Canada or elsewhere. Today, Dubai Singapore or Hong Kong suffice. The only upside of Dubya ruining our image abroad-good luck getting sovereign nations to sign treaties reporting US taxpayers for the next 20 years. Keep freedom alive somewhere.

[Lafayette]

JK: Pay on Wall Street is determined more or less by the same method that determined the booty of Sir Francis Drake

Sharing in the Greed Mechanism

Poor Sir Francis, he probably rolled over in his grave when he saw that one.

Pay on Wall Street is determined by "market factors". When, as a Board member seeking a new CEO, you go to a Head-Hunter, they will tell you what the Going Rate is and then help you sweeten it to attract someone you want. (For instance, up-front stock-options a portion of which are exercisable immediately.)

Then, they turn around and tell some other Board what the New Going Rate is. They do this because their commission is based upon the first year total Comp. So, they have a Vested Interest in making sure that Compensation is as high as possible.

Once enthroned, CEOs have multiple ways to manipulate the Board: (1) Stuff it with their cronies, some who are direct reports, (2) Golf with Board Members to win them over or pay holiday trips for them on the corporate jet, (3) Get control of the Board's Compensation Committee and influence stock-options/pay not only for themselves but their Top Directors. (I could mention Freemasonry, but I wont. Never, however, dismiss the power of this sect that has run many a corporation, especially in HiTech.)

All these tactics are permitted because there is no law in the land that determines the legal responsibilities of the Board to the stockholders. None, nada, niente, rien.

So, the CEO has great latitude to do whatever they want -- even ruin a company. They will get a Golden Parachute, whatever the outcome. In our Meritocracy, this is cronyism at its worst.

So, as for your those cute ideals we have regarding Property Ownership ... well, they don't apply to Corporations that do as THEY see fit and not YOU, the stockholder.

And, of course, there is the fact that stockholders simply don't give a damn because they are only after equity appreciation, not improvements in corporate governance. So, the CEOs give us some crumbs in terms of dividends, wax romantic about the future value of the company -- all to make sure that THEIR stock-options get the lions share of the booty.

It is the Equity Markets that gives us the return-on-booty that we seek, not corporations directly. We are all sharing in the Greed Mechanism.

Sir Francis would surely have been proud of that, wouldn't he? Queen Lizzie as well, methinks. After all, she was the CEO! ;^)

[Lafayette]

esb: If so, and if you have some connection over there (or even if you do not) and care to comment here, can you imagine the intensity of a fall campaign in which one of the contenders asserts the need for such a "New New Deal?"

Where's the beef?

When I wrote that, I had inserted (then deleted) a comment that proposed we think of better phrasing.

That phrase harks back to the past, and we should be looking to the future. Besides, I am not sure we want to do exactly what Roosevelt did.

Let's get away from Image and look for Substance. (I.e., "Where's the beef?"). People are fed up with just words; which are just bla-bla-bla.

I have outlined what I think is necessary. Get back to pre-Reagan taxation levels and use the funds on some well-established goals that one might call "Deliverables":
(1) A Health Care system, not just coverage for everyone. The latter is a palliative founded on the back of a present system that is broke and cannot be fixed.
(2) Education is a birthright, like Health Care, and should be assured by the government. We need not expect either philanthropists or parents to assure a post-secondary school education for our nation's children.
(3) Our National Infrastructure is broke and this is where a N2D (New New Deal) would look most like the original, because it would put people to work. But, remember, Roosevelt did not have the problem of a Chronic Deficit staring him in the face. (The next PotUS does, aggravated by the colossal ineptness of the present lead-head.)
(4) Infrastructure Renewal should look at both ecology and nuclear energy to unhook our economy ASAP from the carbon molecule. These require crash funding of vast R&D projects and a reduction of emission standards that force industry to cooperate. It also affects National Transportation, which is far too dependent upon Road Transport.

And, these highlights above should suffice (for this post). The rest is nitty-gritty; but Program Details never won a candidate an election. Unfortunately.

A New New Deal is just words unless backed by some concrete, fundable, propositions that demonstrate a clear commitment to change the way America is today and will be tomorrow.

NB1: France is going through the same tortuous reformation, and it will take more than a decade. There is no quick fix, even as much as the electorate may be looking for that pot-of-gold at the end of the Rainbow. It just ain't there.

NB2: If it were not for WW2, Lord knows what would have become of Roosevelt's New Deal. The war changed everything and put Americans back to work definitively. If we promise a New New Deal, will that be the outcome, durable employment? It had better be ...

[Lafayette]

rpfrw: What kind of jobs are these that depend on one person screwing someone else?

Oh, get off it, will you.

You haven't apparently the foggiest notion what Sales is like, or you wouldn't belittle the profession.

It is key to any business effort and when done properly the achievement is downright pleasurable. And, contrary to what you may think, it is NOT for greedy fools who pander to clients in order to "screw them".

Like any profession, there are some dunderheads. But, it rarely the case, in my experience, of any one apple spoiling the entire barrel. We throw rotten apples to the pigs before any such calamity.

Besides, if you think it is so damn well remunerated, you might think of not wasting your time in this forum and getting into the profession.

[zinc]

Explicit government support of over valued markets and prices is the worst form of complicity. As long as stock prices are high and going up, all of the corruption probems are swept under the rug. It's called moral hazard and it is at the root of all of todays credit problems and over compensation for incompetent monopolists.

A stock market crash would focus attention on the issues faster than any other mechanism. Mr. Bernanke bailed them out too fast. The speculators, corrupt and inefficient companies and executives, and failed governments will not be touched until it comes time to pay the piper. Hopefully, there will still be something left to save.

[Real Person from the Real World]

Lafayette: So, are you in sales? I've done sales, not corp sales, but saffing and outsourcing, and it's lies, lies, and more lies. Sales have always had a function, just only recently so many low paying jobs out there in sales, all dependant on a commission to bring home a liveable salary. Now-w-days, so many jobs are sales.... You've never worked with a 3rd world jerk who browbeats you to make 200 calls a day, and set 5 apointments, while at the other end, the boys back in the home country are on chat flirting. The gentlemanly sales of an established company actually selling a product are not what I am talking about.

[Lafayette]

rp: You've never worked with a 3rd world jerk who browbeats you to make 200 calls a day,

Is a public forum the place to bring up your own personal problems at work?

I don't think so.

[cm]

Lafayette: But even in "respectable" companies salespeople and generally commission earners are usually held to rather ambitious volume/revenue quotas. Unless the product you are selling/supporting commands excellent leverage, your quota will be a tall enough order to fill, and as long as your management thinks they can replace you with the next guy, you can ponder the tradeoff between playing straight, working your butt off, fudging, or being eventually fired.

I have heard of some of the things that are going on in respectable companies' sales groups, and it all suggests that the closer you get to the feeding trough, the rougher the game gets, anywhere.

[paine]

joebeerdrinker1776

thank you
for your inspiriting words

if you don't really exist out there in meat world
and in the millions
then country joe goooobles and the brown shirts
need to invent you

Lafayette says...

MT: Often, it is the threat of taking action, not the action itself, that promotes changes that reduce inequality.

A vainglo