Too Big for Bonuses

English: Wall Street sign on Wall Street (Photo credit: Wikipedia)

"Michael," of "Bankers Anonymous," does a very nice job of taking apart the argument in favor of large bonuses for Wall Street bankers.  As he points out, it makes perfect sense to have a system of bonuses regularly in excess of annual salaries in a business noted for risk, with a premium on rewarding the very best and brightest. Accept the assumptions, and the conclusions follow.

BUT..and you knew this was coming, didn't you?...when dealing with "Too Big to Fail" banks THE ASSUMPTIONS ARE NOT TRUE.  Risk is minimized and underwritten by the public underwriting of losses for megabanks.  Much as Freddie Mac and Sallie Mae were (are) ostensibly "private" institutions, set up by government, supported by government, guaranteed (formally or informally) by government, the superbanks have grown (with the regulatory and policy collusion of government) to the point that they are, in fact, not private in most important ways.

"Michael" puts it better than I:

...As long as you know the government’s got your back, you’re not really private. 

If you’re Too-Big-To-Fail, you’re Amtrak in my book.  None of you should get more than a few hundred thousand annually.  And that’s being generous. 

Now, before you accuse me of being a Communist, or a Wall Street hater, let me clarify. 

I love private enterprise. 

I applaud successful hedge fund managers, for example, and I do not begrudge their extraordinary compensation, provided they follow the rules and manage capital for willing investors. 

One of the keys to my applause, however, is my belief that any of those hedge funds could disappear tomorrow, as a result of a bad bet, misplaced customer funds, or a faulty computer algorithm, and no government entity will step up to save their bacon. 

I long for the day when the employees of Wall Street banks can reap legitimate profits, if they deserve it, or similarly disappear without a whimper, if they deserve it. 

If the Too-Big-To-Fail banks managed to break themselves into systemically irrelevant parts, I would have no problem with their executives paying themselves massive bonuses in good years.  They’d have earned it. 

But until that day, when they’re finally Too-Small-For-Bailouts, please don’t pretend that they’re anything more than a big NASA – a bunch of smart people in a big room full of flat screens, filling an important government-subsidized mission – working on the taxpayer’s dime.

Logically, you can't have it both ways. If the banks (or any other entity) are so important they function as a public utility--and that's essentially the justification for the bailout--they need to be regulated as a public utility, and their jobs need to be compensated in a way and to a degree similar to those of any other public utility.

Are Banker Bonuses Fair? - Business Insider

Related articles

• Banker bonuses down? Don't believe a word of it.
• Is this the end of bonus culture?
• Why It's Smart to Be Reckless on Wall Street
• HedgeFundMarketing.org Forecasts Bigger Legal Departments in Wake of New Regulations
• Brussels Bricks Bankers' Bonkers Bonuses
• Bonuses: the essential guide

Students (loans) really are America's future

 Perhaps I'm especially sensitive to this because my own education debts will probably outlive me, but it seems to me there's something wrong with this picture.  Namely, what is the single largest asset on the balance sheet of the Federal government?

 That's right:  student loans.

The US Government's Single Largest Asset Is STUDENT LOANS - Business Insider

Related articles

• Student Loan Debtors Are Often College Dropouts

  ---

• President Obama Says Keep Student Loan Rates Low

  ---

• America's Student Loan Racket

  ---

• Discharging Student Loan Debt through Bankruptcy

  ---

Anonymous strikes again

Anonymous disrupted the website of the Greek Ministry of Justice late last month.

The message, in greek (of course) is supposed to read something like this (and note that I've taken some liberties to make the translation flow better):

Citizens of Greece

     We are Anonymous.
     We watch every day as your government abolishes the constitution and institutions of the country.
     We see them leading you closer and closer to poverty.
     We see them pass laws that deprive you of any right to dignity.
     We see them deliver the country to the IMF and the bankers.
     We know about the soup kitchens in schools,
     for people who are left jobless and now wait in queues for a plate of food.
     We know that your country voted for ACTA in your effort to silence other Greeks.
     We know everything ...
     The Republic in Greece has died.
     It died with a government that has not been elected by the people.
     And for this reason the time for discussion came and went.
     Not negotiating anything with any of those who murdered it.
     You can hunt as you like, you can even capture some of us,
     But when you attempt to silence us ...
     For every one that will you capture 3 others will spring up. Five or ten or a hundred.
     Now the Greeks are all Anonymous.
     We are millions against you and the 300.  In this war tear gas will not help you.

     To the Occupying Government of Greece
     These days is going to vote for a bill that will be the last nail in the coffin of Greece.
     A bill to return the country to a totalitarian rule.
     To bring the country and its people in absolute poverty.
     We will not allow more misery to the Greek people.
     We demand your resignation immediately, and elections.
     We demand that not a cent be paid to your moneylender 'friends.'
     We demand the immediate withdrawal of the IMF from Greece.
     Justice Department, this is only a small sample of what we're capable of doing.
     You have not seen the full wrath of Anonymous.
     For each article of a bill that would shame the vote,
     we will shut down the system and delete the Internal Revenue debts of Greek citizens.
     Debts which requires them to pay the fascists.
     The demonstrations of the Greeks have had their encounter with incredible violence,
     anexelekta hitting, but the internet is our field. And we love this war.
     We are many and we will be swift.

     Citizens of Greece, Anonymous is now fighting on your side ... 

     Government of Greece, let us wait ...

     E X P E C T  U S !

     J U S T I C E  I S  C O M I N G !

The Greek police announced the arrest of three teenagers for the hack.  But the meme goes on--Anonymous has brought down the MoJ website with a DDoS attack, in retribution for the arrests.

In other news, several members of LulzSec, the group that left Anonymous to follow its own agenda--including the recent hack of Stratfor--have been arrested.  It seems that the FBI was able to get one leader to turn on his buddies.  The organization may be crippled.  That is what happens when you start moving from leaderless resistance to a collection of leaders and followers.

Related articles

• Anonymous Attacks Greek Ministry of Justice Website (ibtimes.com)
• Greece steps up pressure in uncertain bond deal (sfgate.com)
• Greek police is going after three teen Anonymous members (thenextweb.com)
• Greek police say schoolboys behind hacking attack (seattlepi.com)
• Anonymous Hacks Public Intelligence in "Friendly Audit" (publicintelligence.net)
• STRATFOR hacked by Anonymous--and so was I (secureliberty.blogspot.com)
• Anonymous Take Down Greek Ministry of Justice Site (techfleece.com)
• Do You Like Online Privacy? You May Be a Terrorist (publicintelligence.net)

The Eurozone

Thanks to Frank Jacobs and his Strange Maps.

Hard talk

I mentioned this in class the other day. The whole interview (from BBC) is worth the time. For many people, the idea of "saving" the Eurozone is turning into a (sad) joke. One of my favorite quotes:

"...you know how screwed up Europe is when you have a German pope and an Italian central banker."

The real fun begins around the 12:30 mark.

One nation under law

Russia and China

STRATFOR has an interesting comparison of the immediate prospects for Russia and for China.  For Russia, the fact that the (nearly bankrupt) Greek government is going to them for help--after being rejected by the EU--is a blow to the eurozone and a boost for Russia's prestige.

This was an avenue that both Iceland and Serbia took during their economic crises, and each time the EU responded with financial aid of its own to counter Moscow’s rising influence. A Russian loan to Greece — no matter what the actual size of the aid package — would be a psychological blow to EU unity. An EU member state — a eurozone state no less — finding financial assistance in Russia rather than among its fellow euro users would lay bare the EU’s inefficiency, particularly in times of crisis management. Moscow would therefore send a powerful message to Central European states that see the EU as a counter to Russian spheres of influence on their borders.

China has the problem that it's stuck between saying no to helping Iran resist American sanctions--which would undermine its claim to counterbalance American power in the region--or try to block the sanctions--which it doesn't have the immediate infrastructure to do, and would encourage more Sino-US tensions.

While sanctions may not specifically target Iranian oil exports, Beijing reasonably fears they could create a chain reaction jeopardizing its oil supplies not only from Iran, but also from the rest of the Gulf, since these shipments pass through the Strait of Hormuz where Iran is most likely to aim any retaliation. While China’s economic growth rate is high, serious vulnerabilities exist in the banking, property and export sectors, all of which the government is attempting to address without triggering a destabilizing slowdown. Now would be an exceedingly bad time for a sudden energy shock.

Moreover, much of the credibility of China’s claims to rising international status rest on its ability to defend smaller states like Iran that are antagonistic to the United States. If China drops Iran at the first sign of American coercion, a host of other states — in Latin America, Africa and Southeast Asia — will rethink whether they can rely on China for support. In such a case, Chinese leaders would struggle to allay domestic outrage at yet another example of acquiescence to the United States, while much of the political capital they have painstakingly built up in recent years through speeches, state visits and investments across the world would be squandered.

From the Chinese perspective, it's one more reason to develop a much greater naval presence, or to work out some kind of arrangement that makes China's access to oil less dependent on the good will of the US Navy.

I wonder how the debt issue fit into this?  By some measures, the British economy is in even worse shape than the economy of Greece, and American problems are growing rapidly.  Can the Chinese find a way to use the debt as a lever?

"This report is republished with permission of STRATFOR"

Comparing the crisis and response

Hat tip: Harvard Business Review; Organizations and Markets blog

Monitoring the budgetary apocalypse

Remember: these are the official estimates.

Bernanke op-ed in the Wall Street Journal

Ben Bernanke wants to assure people that the Fed isn't just throwing money at the current problems, unaware of the long-term impact on inflation.

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.

Gee--is everybody confident now? A few observations:

1) The chairman of the Federal Reserve Board is worried enough about confidence that he chooses to make this statement.

2) He does so in a form that allows no questioning or rebuttal.

3) To the extent that he discusses the tools to contract the money supply, it's all pretty much the same as before. We've learned they aren't nearly as all-powerful as he want us to believe.

4) Bernanke says almost nothing about the international dimension--including foreign exchange and the impact on what has been the world's reserve currency.

5) All these promises miss the political dimension altogether. Are we really to believe that those who have been personally helped by recent policies--bailed out banks, investment houses, Fannie Mae, Freddie Mac, etc.--are going to sit by and watch the Fed crank up the pain? The relation of Congress and State governments to the stimulus package is similar to that of an addict to cocaine. The American people will want their freebies, and they won't want to pay for them.

I'm supposed to feel more confident after reading this?

Bernanke Op-ed in WSJ: The Fed’s Exit Strategy - WSJ.com

Cycles and reforms

There's a very good discussion at The Baseline Scenerio (an all-around source for thought on the financial crisis). The short form: the US has done as well as it has because of the rule of law, but this has been undermined on more than one occasion by corruption and the concentration of power. Although there can still be "banana booms" (I love that term--comparing the current structure to banana republics), they aren't sustainable. These problems have led to course corrections in the past (under Johnson, TR, and FDR), but it isn't easy, and the reform period has averaged five to ten years. If it can't be fixed, we are doomed to a cycle of "oligarchy-boom-bust-oligarchy".

Global Crisis And Reform: Starting A Long Journey « The Baseline Scenario

Busy, busy, busy

The announced schedule for this week:

Stratfor.com released a "Red Alert" yesterday that credits the G-20 and surrounding summits with more significance than I had believed.

Taken together, this array of diplomatic meetings constitute the greatest density of decision points in the modern world since the summits that brought about the end of the Cold War. This is a time when the true colors of nation-states come out, as each fights for their political, economic and security interests behind a thin veneer of global cooperation.

Well, yes...but how much will they accomplish? STRATFOR, which is usually pretty good about this sort of thing, concludes that there is a "redefinition of global systems is taking place that will carry well into the future." I can agree with that. I tend to see what's happening now as the start--or maybe the midpoint--of the process. Too many states (including the US), in my opinion, haven't yet grasped the full magnitude of what's going on, and are unwilling to negotiate the kinds of concessions on all sides that a full restructuring will require.

But hey, I've been wrong before. Keep watching.

Where the new package is going (so far)

Taking Apart the $819 billion Stimulus Package - washingtonpost.com

Government and industry

Fabius Maximus posts a graph of the changing numbers of Americans in manufacturing jobs and in government jobs.

Assuming the data is valid (and I have no reason to doubt the general trend), American has crossed another symbolic threshold.  (See the prior post on Atlas Shrugged.)

America passes a milestone! « Fabius Maximus

Ayn Rand Shrugged

There’s a lot to criticize in the work of Ayn Rand—she’s always seemed to me to be a better novelist than political theorist, largely because of her tendency to think in absolutes when absolutes are inappropriate. Perhaps that’s why I’ve preferred The Fountainhead to Atlas Shrugged.

But I must admit that Atlas Shrugged is, in many ways, a lot more true to life today than it was in 1957, and it’s because Rand recognized some fundamental tendencies in American (and global) politics and economics. Industrialists are not all heros; politicians are not all corrupt or idiots. Nevertheless, there are some ways in which the profession of politics selects for the corrupt or the idiot.

An op-ed in today’s Wall Street Journal makes the point:

Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.

Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

'Atlas Shrugged': From Fiction to Fact in 52 Years - WSJ.com

The selective blindness of "political" economists

Economist Arnold Kling puts something into words far better than I have been able to when he draws parallels between today's standard prescriptions for bailouts and the god-awful military tragedy that was the Battle of the Somme.  After listening to a discussion by Joseph Stiglitz and Martin Feldstein, interviewed by Charlie Rose, Kling notices that the experts were unwilling--or unable--to draw the obvious conclusion that what they were proposing hadn't worked, and instead argued for much more of the same:

I was reminded of the Battle of the Somme, one of the worst policy blunders of all time. Having experienced nothing but failure using offensive tactics up to that point, the Allies decided that what they needed to try was....a really big offensive. Just as Feldstein and Stiglitz pay no attention to the on-the-ground the housing market, the British generals ignored the impact of machine guns on men advancing over open fields.

My guess is that in 1916, anyone who doubted his own ability to direct an enormous offensive involving hundreds of thousands of soldiers would never have made it to general. Similarly, today, anyone who doubts the ability of a handful of technocrats to sensibly allocate $800 billion would never make it into government or the mainstream media.

The Stimulus and the Somme, Arnold Kling | EconLog | Library of Economics and Liberty

Friedman gets it right

Tom Friedman has his good days and his bad days. Today's column in the Times is one of the good days. A gem from around the middle of a discussion of the auto "bailout/reorganiztion":

...someone in the mobility business in Denmark and Tel Aviv is already developing a real-world alternative to Detroit’s business model. I don’t know if this alternative to gasoline-powered cars will work, but I do know that it can be done — and Detroit isn’t doing it. And therefore it will be done, and eventually, I bet, it will be done profitably. And when it is, our bailout of Detroit will be remembered as the equivalent of pouring billions of dollars of taxpayer money into the mail-order-catalogue business on the eve of the birth of eBay. It will be remembered as pouring billions of dollars into the CD music business on the eve of the birth of the iPod and iTunes. It will be remembered as pouring billions of dollars into a book-store chain on the eve of the birth of Amazon.com and the Kindle. It will be remembered as pouring billions of dollars into improving typewriters on the eve of the birth of the PC and the Internet.

Frankly the whole idea of a "car czar" leaves me a little sick. Remember how well the other czars did? The energy czar? The counterterrorism czar? The Romanovs? Beyond the appeal for some that they can grab short-term power, I can't see why anyone would want to take that path.

International barter

Iran has oil. Thailand has rice. Neither has cash or credit. So it's time to do things the old-fashioned way.

Meanwhile, the EU pushes another stimulus package, and China's central bank makes its biggest rate cut in eleven years.

In the good news, it may be time to refinance the mortgage.