Saturday, February 28, 2009

Anger at Bankers

I've been working in Britain this week, and the tabloid press has awakened to the scandal of the Royal Bank of Scotland's dependence on the British government for its survival, which required an additional L 325 billion in insurance and L 25.5 billion in directly injected government capital in a week in which it announced a L 24.1 billion loss for 2008 (L 40 billion absent some technical issues). The tabs analyzed the absurd, make-up securities on which RBS made billions before it lost billions, and proposed the de-securitization of the transactional banking system while slamming the phony "value" created by bankers who got rich on commissions - that is, not by creating anything valuable but by charging a toll like the troll who lives under the bridge. "Fred the Shred Revealed as Biggest Troll of All" screamed the respectable center-left paper The Guardian, in a story that carefully exposed Fred's personal net worth, and likened his position in the bank to a mosquito with a hundred beaks for sipping the blood of depositors and taxpayers.


None of that reporting happened, although the events did. That'll be the day.

Well the tabs did perk up a bit at RBS's former head Sir Fred Goodwin's pension, at L 693,000 per year unto death, and headlined "Fred the Shred"'s refusal to give it up. PIGGY BANKER shouted the giveaway paper The Metro, and provided this helpful illustration:
Shades of that great 1970s slam of British capitalism O Lucky Man, in which eager-beaver salesman Malcolm McDowell stumbles onto a military-industrial experiment that consists of fusing humans and pigs - perhaps to create the perfect consumer we need to get us out of our new depression.

There are two statements that Fred the Shred's pension prompts.
  1. leaders of failed enterprises shouldn't be rewarded for a bad market performance.
  2. leaders of successful enterprises shouldn't be given the rewards bankers were getting in the first place.
But actually only #1 has been spoken. # 2 is lurking around the edges, as when the Guardian's print version of this story on Obama's budget was actually headlined "Republican anger as Obama plans to tax the rich in L3.5 trillion budget." (The Guardian also carried a story titled "Rich seek tax breaks to fund UN development donations." - well that speaks for itself.) The idea that the billionaire men's clubs were not making "market" salaries has appeared in veiled form from establishment centers, as in this comment on Sir Fred's pension:
Bank of England governor Mervyn King condemned executive pay and the City culture of bonuses and pensions.

He said: 'It was a form of compensation that rewarded gamblers if they won the gamble but there was no loss if you lost it. It's obvious that if you do that you will give people incentives to gamble."
This is at least right in assuming that Sir Fred's toxic security marketing wasn't creating value, and the rewards for that were not tied to value creation. But we need to go farther (without sinking into the deep philosophical questions like "is value in the eye of the beholder"?)

Farther can be simple. Picture the proverbial market in which people step up one by one and sell their type of labor to an assembly of buyers. The plumber comes forward, the wheat farmer, the winemaker, the neurosurgeon, the divorce lawyer, the farmworker, the high school teacher, everybody is there. Let's say most of these folks get market bids - it is open bidding, so its actually a broad social conversation - that are close to the current average of their salary category. The neurosurgeon makes $600,000, or 10x the high school teacher and 20x the farmworker. We can debate how right this is, but say you have a 20:1 spread for whatever reason.

Then the Fortune 500 executive steps up, and is followed by a hedge fund manager.

What possible argument could show that in our primal auction the assembly that represents the market would pay the CEO $14 million a year (233x the teacher) and the manager of a top-20 hedge fund $657.5 million a year? (10,958x the teacher?) To earn what the hedge-fund manager earned in 2007, the teacher would have had to start working 9,000 years before Christ was born, in the middle of the last Ice Age. What actual living "market" of real bids would ever bid within a factor of 1000 of those numbers? Why would such a group give a banker even a dollar more than a neurosurgeon? or a farmworker . . . but well we are talking about current society.

It's pretty easy to show that the idea that $14 million is a market salary is ludicrous. It's less easy to have a general discussion about this.

The issue has as special urgency this week, as we learned the economy went off the cliff. Housing prices continue to plummet, and the Center for Economic and Policy Research projects that
the median household in the 45 to 54 age cohort saw its net worth drop by more than 45 percent since 2004, to just over $80,000 (including home equity). For early baby boomers, those between the ages of 55 and 64, the losses were not quite as steep but still came to 38 percent of net wealth, with the median wealth falling to $140,000, approximately 80 percent of the price of the median home. Nearly 30 percent of late baby boomers will need to bring cash to a closing to cover their outstanding mortgage and transactions costs.
In CEPR's scenarios, the American Dream home destroyed most f the wealth of its owners between 2004-2009. In two of the report's three scenarios, renters have more wealth than homeowners when they try to retire.

The US press is showing its mental blinders by casting Obama's first budget entirely in political terms: is this the end of Reaganism? Well yes, but actually Reaganism ended itself by blowing up with no help from the Democrats or Obama. The real issue is: WHERE IS THE MONEY?

We'll need to work on the following things:
  1. attacks on and full discrediting of market culture: the rampant, delirious anti-egalitarianism that make this fragile, collapsed banker capitalism possible and, more importantly, immune from criticism. These spreads will need to be denounced as widely as Fred the Shred's pension before we can exit the Age of Inequality that undermined our societies and our economies at the same time. (See Reich's liberal pragmatic explanation that inequality hurt the economy, and Wolff's left-theoretical one).
  2. forced repatriation of US wealth hidden offshore (there was a start on this last week).
  3. taxing the rich.
It's either that or the steady downgrading of the poor and the evaporation of the US middle-class at the same rate as the fall of housing prices and the disappearance of large-company jobs.

PS. Aficianados of the bankers' phony markets will enjoy this story about the non-value of collateralized debt obligations (CDOs, of which securitized subprime mortgages were a subset): different classes of AAA-rated CDOs are seeing recovery rates of from 32 to 5 cents on the dollar.

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