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Wealth and Wall Street
Gabe Sherman has a piece today in New York magazine about how gobsmacked the Wall Street crowd is that people are pissed off at them these days. 
There are a million things you could say about it — and since I'm coming late to this, a million things probably have been said about it — but I just want to excerpt this one piece:
Wall Street people are not moral idiots (most of them, anyway) — it’s not as if they’ve never pondered the fairness of their enormous salaries. “One of my relatives is a doctor, we’re both well-educated, hardworking people. And he certainly didn’t make the amount of money I made,” a former Bear Stearns senior managing director tells me. “I would be the first person to tell you his value to society, to humanity, is far greater than anything that went on in the Bear Stearns building.”
That said, he continues, “We’re in a hypercapitalistic society. No one complains when Julia Roberts pulls down $25 million per movie or A-Rod has a $300 million guarantee. We have ex-presidents who cash in on their presidencies. Our whole moral compass has shifted about what’s acceptable or not acceptable. Honestly, you can pick on Wall Street all you want, I don’t think it’s fair. It’s fair to say you ran your companies into the ground, your risk management is flawed — that is perfectly legitimate. You can lay criticism on GM or others. But I don’t think it’s fair to say Wall Street is paid too much.”
It's hard to know what to say about this. It just leaves you speechless. And this guy is one of the more self-aware ones.
Later on Sherman quotes another Wall Streeter who's livid over Obama's plan to raise tax rates slightly on the rich. "He doesn’t want to have any wealth creation," the guy wails, and that really seems to get to the heart of all this. Financial industry players sincerely seem to view all "wealth" as equal. If the market pays you a lot, it's because you're responsible for creating a lot of wealth, and that's that. The fact that the wealth you created was largely divorced from even a notional real-world benefit to the larger economy doesn't matter. Money is money.
Still, both these guys are right: the big players in the financial industry get paid a lot because they're responsible for creating gigantic streams of money for their firms. As long as that stays the case, they're going to continue making truckloads of money no matter what we do. But if we reduce that stream of financial rents to levels more related to the actual value it creates in the real world, pay levels will become more reasonable too. That's what we should focus on.
Makes me want to puke....
Or makes me want to get a 12 gauge. So he is comparing himself to an entertainer? At least a bad movie or baseball season doesn't throw the country/world into recession. Thank goodness he is so self aware, would hate to think of him as an unthinking, greedy, asshole.
Who says no one complains
Who says no one complains about people like Julia Roberts or A-Rod? Both are as much symbols of our dysfunctional society as the Wall Street types. It's just that neither Julia nor A made their fortunes by convincing people to buy homes that they couldn't afford, so they are not on the hot seat today.
--Larry
Yep. And there is a simple
Yep. And there is a simple solution to odd cases where economies of scale lead to a few individuals, like actors or entertainers, getting money vastly out of proportion to any reasonable concept of what they deserve or have earned: high top marginal taxes and inheritance taxes.
There are odd crevices in a huge economy like ours where ridiculous pay can pile up for people at times (like celebrities becoming human brand names). Taxes are a great solution to spread that poorly allocated wealth back out.
And a heck of a lot simpler
than "reducing that stream of financial rents," whatever that means. The grotesque salaries the "market" for professional athletes has created-- and it ain't just A-Rod but vast numbers of people we've hardly ever heard of-- are what's put a lowly bleacher seat out of reach for most ordinary folks. And you have to take out a home equity loan to take your spouse and kids to a basketball game.
It's nuts all the way around, whether it's Julia Roberts or Bear Stearns execs. Making an obscene amount of money has no rationale other than keeping score for either of them.
Put back the up to 90 percent maginal rates, and they'll all have to find other ways of keeping score.
It's easy to say something
How about "Since you made so much when times were so good, you should lose a commensurate amount of money when times are bad. So, give it back, asshole"
or maybe "Don't try to pick up the soap from the shower floor"
Well, but ...
But if we reduce that stream of financial rents to levels more related to the actual value it creates in the real world ...
Sure, but that's the whole problem, innit?
Number one, they run the waterworks, and we're saying, we need to limit how much water they drink. Well, how are we going to do that? Make them a regulated utility? Competition sure doesn't work; they tacitly (and not so tacitly) collude, and they all make out like bandits.
And number two, it is precisely their control over the system that enriches them and constrains us that is the problem! They screwed it up, we try to hold them accountable, and they say, hell with you, we'll just shut it all down and go to the Hamptons. Guess who wins that blinking contest.
I actually feel sorry for Geithner -- they have him by the short-and-curlies. And I'm afraid that, until Obama makes a serious Medici-esque spectacle out of a few of them -- hanging them alive over the castle walls and then leaving their bodies to rot on the hooks -- AND he weathers the inevitable retribution of the industry (they WILL rally to their own), then nothing will change.
I see nothing wrong with
I see nothing wrong with hedge fund managers' incomes that a 90% marginal tax rate wouldn't fix.
How did they create wealth?
If I rob a bank, I'm richer, but did I create wealth?
This guy doesn't read the NY Post
or he'd know there are a TON of people who complain about A-Rod's salary, particularly in October when he's gone 3-36 in another playoff series.
Entertainers
Who says no one complains about people like Julia Roberts or A-Rod? Both are as much symbols of our dysfunctional society as the Wall Street types.
Like it or not, A-Rod and Julia Roberts provide something of value to society. They entertain, and they're paid commensurate with basically what we as a society have deemed their value. If people didn't pay a lot of money to see the Yankees, or to see Julia Roberts' movies, they wouldn't be paid so much. We've placed a certain value on entertainment, and their salaries are a reflection of that. My brother and sister are teachers, and they get paid teacher salaries. You can argue that they're more valuable to society, but the fact is there are many more people who can teach than there are who can hit .320 with 35 homers while playing a gold glove caliber third base.
That said, at least A-Rod and Julia Roberts produce a product for public consumption, and I can decide whether to pay for it or not. They're accountable to the public. What the hell does Bear Stearns provide? It's a bunch of millionaires trading money with one another, with very little accountability.
You do realize
that the majority of those seats for pro sports, especially in basketball but not solely, are bought by the same banks and other corporations that are robbing us blind? There are very, very few seats even available for the general public, and the prices have been driven up by the eagerness of corporations to buy them to give out to favored clients and executives. Count the number of people in suits at a basketball game sometime.
If people didn't pay a lot
That's not quite true, advertising is what sustains all the "Sports/Entertainment Industrial Complex", remove the advertising (a indirect tax on consumers) and the flow of money in the "Sports/Entertainment Industrial Complex" will dry up and so will the salaries. How many people would be willing to pay more than a couple of dollars to watch the Yankees on TV?
What Wall Street has done
What Wall Street has done for some time now is create, not wealth, but the illusion of wealth. That would make it another branch of the entertainment industry, wouldn't it?
Thanks, Kevin, for
Thanks, Kevin, for mentioning one of the areas that needs addressing. That is more than most will do. The wonders of our post WW2 position led us to accept a standard of living and vision that was extraordinary and not sustainable. Rather than take the loss when we got hit with the oil shock, the bill for Vietnam, and the bill for social programs(warranted, if ineptly executed), we fed on our own flesh and embraced a concept that made cannibalism acceptable. Short of food, we had to create increasingly complex deceptions in order to lead the susceptible or compelled, to think they were diners rather than entree's. Putting the high priests on a diet will not, by itself, convert us from an addiction.
In other words
it's all the victims' fault, right?
Kevin I really wish the
Kevin I really wish the people running the country thought more like you.
Probably because our thinking is so similar which i hope isn't the result of me reading your blog too much.
The financial industry should be an incredibly low margin business. Insanely low margin. Unfathomably low margin. Heart-breakingly low margin. Almost impossible to earn a living low margin. With the advent of the computer just about everything a stock exchange did was made obsolete. Just because you are involved in lots of transactions worth lots of money doesn't mean you get a cut every time. Especially when you do absolutely no work, and add absolutely no value to the transaction. Traders should make tens of thousands. Their bosses should make thousands more. We shouldn't be talking in millions and billions, it's just an affront to the idea that money has value that was created by invention and improvement in living standards. Rather than meaningless pieces of paper that we're scrambling to release the intrinsic value of with massive bonfires.
Like it or not, A-Rod and
I don't like it. They're paid commensurate with what we as a decadent society in decline have deemed their value, much as circuses were the rage in Rome.
Really, the blarney that some use to justify their salaries is pretty lame. CEOs, for ex., do not singlehandedly add wealth to a company by "leading," and often are merely bystanders as a top marketing people or R&D people determine the direction of the company.
Well...
I suppose if you're the religious type, you can always take comfort that the last shall be first, the first shall be last, and it's easier for a camel to pass through the eye of a needle than for a rich man to enter heaven, and all like that...
And if you're not religious but have moral sensibilities, then really you should be looking at your own self in the mirror and think about the billion or so people that live at life's margin, without even adequate clean water, and evaluate your own contribution to the welfare of humanity and the planet...
Or, reading bleh's comments, there's those meat hooks, which do sound rather interesting...
Employees
Correct me if I'm wrong, but don't Roberts and Rodriguez negotiate directly with the owners who have money at stake, and not with with other managers trying to disguise high risk schemes as safe and easy money?
Incentives
Here is one question none of the people referenced in the article will answer:
Why not accept a Silicon Valley compensation structure?
The problem here is incentives. There is a failure in corporate governance to address the long-term health of the organizations. These people are meeting compensation goals set by themselves instead of creating value.
Subjective Value makes your goal silly
First, of course the compensation structures, with their poor real alignment with interests - someone above mentioned more venture type structures where you eat losses over a long term as well eat gains - is indefensible for Wall Street.
The howling mob ranting about consumer items is merely boring....
But your observation But if we reduce that stream of financial rents to levels more related to the actual value it creates in the real world, pay levels will become more reasonable too. That's what we should focus on. is dumb.
There is no such thing as "actual value."
Value is not an objective metric (as we should all have learned), it is a subjective estimation, and thus in the short term can be thoroughly gamed. And regardless of gaming, the inherent subjectivity means self-interested blinders can lead one, without engaging in fraud (whatever the fantasies of the hoi poi) getting relative value drastically skewed away from sustainable consensus.
However, reducing financial rents is a proper suggestion, one of your first steps should be to rationalise your regulatory system to have a clear, simple regulatory structure without the bizarre competing multiplicity of independent regulatory bodies, to ensure a global vision on Credit (regardless of whether Credit extended is via something that calls itself a 'Thrift' or a 'Mutual' or just a bank), a single, strong Capital Markets regulator (as a gatekeeper), and something correcting the Ratings Scheme. PErhaps then more regs may be needed, but half your problems come from the insanely balkanised system that allowed all kinds of shenanigans to go on - whether under tight supervision or not.
Lounsbury adds value
Lounsbury,
Subjective or not, your comment above adds great value, and these are the kinds of comments from you I really appreciate.
And back to the comparison of CEOs with movie and sports stars - I am totally sick of big bidness CEOs and their ilk always comparing themselves to entertainment stars in order to try to justify their obscene pay.
Entertainment stars do not set their own compensation. Also, their compensation is PUBLIC knowledge and they are under huge public scrutiny. Their performances are watched by a huge number of people, and they are subject to criticism from every Tom, Dick and Harry with a mouth.
The CEOs and executives of supposedly publicly traded companies operate in secrecy, where the public knows little of what they do and how much money they get. Their compensation is set in secret, by their cronies, and apparently has little to do with any market forces at all. They 'claim' they are worth so much and some other company will steal them away, but how often does that happen?
It is ludicrous to compare the situations between public entertainment stars and private CEOs and executives. It is ludicrous.
Tripp
they have stripped economic power from every other participant
Although misallocating capital is bad for an economy, it is the political power of that capital to influence economic policy that is worse, giving a powerful voice to those lucky enough to accumulate capital without ever having to add any value to goods and services. These lucky ones can be seen on business television programs complaining about the wages of autoworkers and how tax rates for corporations and investment bankers should be reduced. They not only have the ears of regulators and politicians, they become regulators and politicians, using their wealth to broadcast their messages repeatedly to an economically ignorant public, who are unable to recognize wealth earned by adding value to goods and services against wealth earned by asset inflation. Without the power of government to limit the power of capital, even shareholders will eventually lose the value of their equities, and wealth, because they have stripped economic power from every other economic participant, which drastically reduces economic activity. This reduction in economic activity has led to unprecedented public assistance to the financiers, who have used their wealthy influence to claim not only too large a share of economic revenues, but also public ones as well. Wall St. may or may not be paid too much, but it certainly was taxed too low and given too much political power. Until that ends, much worse economic times are inevitable.