So, the Fed has unveiled its plan. Details are somewhat sparse, but as best I can tell:
- It won’t significantly reduce pay
- It will concentrate on risk management, which is to say trying to tie pay to longer term measures rather than shorter term measures
- The big banks will have to give their compensation packages to the Fed upfront, but the review will be confidential. Only the bank and the Fed will know the contents of the review.
- Small banks will have their pay reviewed when they are examined.
Meanwhile, Feinberg, the pay czar, has restricted compensation at bailout recipients. Cash compensation is restricted to 500K a year until they pay back the bailouts, but once they do they can receive more, and they do have bonuses tied to various goals given by the treasury till then.
I am skeptical. The end result of Feinberg’s plan will simply be that the companies will pay off the bailouts as fast as they can, even if that means borrowing the money at higher rates than the feds have loaned it to them.
As for the Fed’s plan, it requires us to trust the Federal Reserve to really restrict pay and to really understand what type of compensation creates long and short term risks. Given the Federal Reserve’s track record in understanding systemic risk, which indicates they have no understanding of systemic risk worth speaking of, I’m skeptical that they can do this. And that assumes one trusts the Fed to tell its friends in the banks they can’t have what they want, which, again, given their track record, is questionable. Especially when the Federal Reserve itself seems to essentially be run by Goldman Sachs.
Furthermore, the Federal Reserve is confused. When they say it’s not about “social equity” it’s about risk, what they mean is “we don’t mind them getting paid a lot of money if it doesn’t lead to risky behavior”. But receiving enough money in a year or 3 years to retire inevitably means that people will engage in risky behavior because they don’t need the job. They may want to keep it, they may like it, but if their company goes under, at the end of the day, they’re still going to be rich, rich, rich—and never have to work another day of their lives. And, after all, even if they do blow it, this crisis shows that the government will probably bail them out so they probably will keep their jobs.
Paul Volcker, the last good central banker the US had, is right. This finicky micromanaging won’t work. He’s right to want to break the banks back up, dividing retail banking from investment banking. And while as far as I’m aware he hasn’t suggested high marginal taxation as a solution to the perverse wage incentive issue, that’s my suggestion. Just tax every dollar after 1 million, on all income equally and with no deductions, at 90%. Tax every dollar after 5 million at 95%.
The objection to this sort of taxation, or any other severe restrictions on excessive pay is:
But, bowing to concerns that too heavy a hand could lead to a mass exodus of executives, both the Treasury and Fed policies will permit top earners to reap millions of dollars.
This is insane. These executives are the folks who lead the world to the greatest financial crisis since the great depression. The goal shouldn’t be to keep them working, the goal should be to convince them to quit. Let some middle managers take over, it is beyond comprehension that they could cause a greater disaster, and if they are only earning a few hundred K a year, they’ll have every incentive to turn their banks around so they can keep their jobs, which they’ll actually need to keep unlike the current generation of overpaid, incompetent, executives.
These executives’ management lead to the greatest destruction of wealth and the largest job downturn in post-war history. They did so by pushing products and practices which were frankly fraudulent. In a sane world, huge criminal investigations would be ongoing and most of them would be spending all of their time huddled with their lawyers, rather than sending out millions of dollars worth of lobbyists.
However, as a second best scenario, their pay should be restricted, and if that makes them leave, well, that’s a bonus. Let them go work for companies in any country stupid enough to want them. Hopefully if not operating from the US anymore they’ll only be able to trash their new host economy, and not the entire world economy. These men and (a few) women, are parasites who feed off and damage their hosts. They are not a benefit to the country or company they work for, but an active hazard.
I’m glad to see the Fed and Feinberg doing something. But it’s not nearly enough, and it won’t be sufficient to stop the same suspects from causing yet another financial crisis.
Mervyn King, the Governor of the Bank of England had the temerity to suggest that banks be broken up into retail banks and investment banks, thus reducing risk and making them smaller so they aren’t “too big to fail”.
Today the Labor government shot back that such a solution is a 1930s solution, but these days it wouldn’t work. The conservatives suggested that they would only follow King’s suggestion if every other country did too. Which is to say, they wouldn’t.
There’s a strange idea in Britain that the financial sector, which is to say “the City”, represents a comparative advantage for them. This idea mirrors the American belief. Both countries are wrong. What has happened instead is that over-sized fraudulent leveraged returns in the financial sector have driven out investment in the real economy. And since those returns were and are fraudulent, when the collapse came the real economy, aka: taxpayers, had to bail them out.
Over-sized, over-powerful financial sectors are parasitical on the real economy, and actually damage it. This is a clear lesson historically, where economic financialization of any country larger than a city state is almost inevitably disastrous.
What is occurring right now in England is a huge amount of slashing of basic services, as both Labor and Conservatives compete to cut, cut, cut. Huge amounts were spent on bailing out the banks, and now it will be paid for by ordinary people. This is a direct transfer of wealth from the real economy, to the financial economy.
England would be better off with a much smaller, weaker financial sector composed of banks small enough to be allowed to fail. If the possibility of them being taken over is Brown’s real fear (and it may well be) then simply create some ownership restrictions to keep them in British hands.
Splitting banks into retail and investment banks, keeping brokerages and insurance companies separate as well is part of a solution set which kept major financial crises like the recent one from happening for most of the second half of the 20th century. It was put in place by people who were experiencing the Great Depression and had learned the lessons of the roaring 20s.
The inability of our decision makers, whether British, American, Canadian or otherwise to understand those lessons and take action is why it is inevitable at this point that we will have an economic collapse. It is, at this point, all but inevitable, not because nothing could be done to stop it, but because no one will do what it takes.
Such a collapse may be as far as two economic cycles out, or it may be sooner, but it will happen. And the sort of non-argument made by Brown “not a 21st century solution”, which is content empty, is why. The real reason is cupidity. Both the British and American governments are completely captured by monied interests and will do nothing significant to reign in those interests, no matter what the costs or consequences for the majority of the population.
And so those consequences will ensure. By not making another financial crisis impossible, they are making another financial crisis inevitable, and next time it will be even worse.
Corrected: Support for Public Option (Does Not) Collapse If Real Public Option Polled
Edit: oops. I’m full of it. Misread the poll. In fact it indicates the opposite of my title. Ignore the below. Perhaps the public option will be fantastically popular.
The problem with public option polling is that the questions imply strongly that everyone has access to it. In fact, most people don’t have access to it (if, for example, your employer offers insurance you can’t opt out and go to the public option.) Kip Sullivan did a bit of investigating and found a poll which actually did inform Americans of this fact (h/t Corrente):
“Would you support or oppose having the government create a new health insurance plan to compete with private health insurance plans?”
Support: 55%
Oppose:42%
Unsure: 3%If oppose/unsure: “What if this government-sponsored plan was available only to people who cannot get health insurance from a private insurer? In that case, would you support or oppose it?”
Support: 21%
Oppose: 24%
That’s quite the difference, don’t you think? As I noted in my last post, voters are going to be furious with Democrats if they pass any of the current proposed health care “reform” bills. The public option in all of them is crippled and the subsidies are low, such that they will eat as much as 1/3 to a half of many people’s disposable income.
Because the public option proposed in any of these bills is not robust, since they won’t have enough enrollment to have market pricing power, and thus won’t be able to force down costs, there is no reason to believe that health care reform will actually contain health cost increases below inflation, let alone below wage increases.
Since the bills also force people to buy insurance, that means voters will be forced to buy insurance whose cost will rise faster than their wages. This is particular pernicious when it comes to 20 and 30-somethings, fresh out of College, with huge student loans already, and few good job prospects.
This is horrible policy. It is also political suicide. The people in the progressive blogosphere who are pushing for a “public option” without insisting on an actual robust option (again, none of the options being considered are robust and even if linked to Medicare rates none of them will be because they are not large enough) are pushing for a law which is a massive giveaway to insurance companies—a regressive tax on the middle class. It is worse than immoral, though it’s terribly immoral, it is a horrible mistake the price for which will be paid at the ballot box.
I have warned on this repeatedly, as have others. We have not been listened to. I am not looking forward to having the last laugh on this, because it is a laugh which will be purchased in the suffering of Americans, but I will have the last, bitter, laugh.
Progressives need to learn how to analyze policy. The reason you elect a particular party, Senator, President or Representative, let alone a Congress, is to implement good policies, not to pass something bad for the sake of saying they passed something.
When you pass good policy (say a stimulus bill which actually improves the job situation, instead of a stimulus bill to weak to do more than slow the bleeding) the population, aka: voters, receive good results. That makes voters happy. When they’re happy, they vote for you again. When they aren’t happy, they don’t. This is how LIBERAL government works. Do good things, reap the benefits.
Reactionary government figures that if you give enough money to private interests and throw a few scraps to the population, you can buy the election. But it doesn’t work. Democrats received more money from special interests last election not because special interests decided they loved Democrats, but because the Republican brand was so sullied they knew the Republicans were toast. So they gave money to the Democrats to protect their interests. They bought in.
But the second Democrats are weakened, and Republicans look like they can win, they’ll go back to giving Republicans most of their money.
The right thing to do, passing good policy, isn’t just the right thing to do morally, it’s the right thing to do pragmatically. It is clearly pointless to expect most Democratic legislators to do the right thing for moral reasons, but it would be nice if they understood they are cutting their own throats by continuously passing bad policy.
Digby gets it, noting that many middle class folks are going to be forced to spend 1/3 to a half of their disposable income to buy insurance. This is something Dave Johnson and I have been screaming about for months.
I don’t care whether there’s a lousy, weak public option. Even if there is (and even the House bill’s public option is weak, 12 million people will not provide sufficient market power to lower costs significantly) health care reform as currently suggested is profoundly stupid and venal. It is a regressive tax on ordinary Americans which is funneled to private industry. People are going to be forced to buy insurance they really cannot afford.
Digby is right to be worried about the backlash. I wouldn’t want to have to defend this to someone whose discretionary income got slashed by a half or a third. Who is worried about eating or paying tuition for their kids because they have so much less money. Or 20-somethings out of university, crushed by huge student loans, also being forced to buy insurance they can’t afford and realizing that means they’ll never, ever, be able to afford a house.
The people who are pushing a lousy public option as if it will fix the problems innate in an individual mandate system are welcome to take the “credit” for doing so. Because this is insanity. Absolute insanity. And everyone pushing for it, whether they call themselves progressives or not, is aiding and abetting this insanity and will be bear responsibility for the backlash.
And there will be backlash.
Apparently we’re looking at three columns of troops, about 30K in number, with air and artillery support against somewhere between 10 to 25K Taliban and allied groups. The army has said that they figure everyone in the area is Taliban or supporters since everyone else should have left, but al-Jazeera is noting that the population is about 500K, and only 150K or so have left.
The obvious model for the Taliban to use is the Hezbollah model, so successful against the Israelis during the last Israeli attack on Lebanon. However Pakistan forces are a lot more willing to take losses than Israelis, and I can’t imagine the Taliban have the discipline, iron-clad secrecy, and technical chops of Hezbollah. Let alone years to build up a bunker/comm/tunnel network.
That said, if I were the Taliban and I’d decided to fight, certainly I would be trying to copy Hezbollah. Heavy heavy dig in, well camouflaged. They have to blunt the enemy’s air power, channel them into killing fields, and make it into a morale battle (the one place where they had better have an advantage, if they hope to have a chance in hell of winning.)
The army stating they consider everyone remaining a Talib or a supporter means they don’t intend to let the Taliban go to ground in the population—they’ll kill civilians if necessary.
Isolate – concentrate – annihilate. The anti-guerrilla playbook.
We’ll see if the Taliban is playing by that book.
My bet is on the army, at least for the duration of the operation (they’ll get cut up by pinprick attacks later). But if they lose the operation outright, it will be fascinating.
So, what’s wrong with this thinking? First, from the NYTimes:
The shrinking supply of these apartments, highlighted by researchers at New York University, illustrates not only the increasing strain that housing costs have had on this city of renters, but also the limits of the mayor’s success in providing the city’s poor with reasonable places to live. While the mayor’s plan has put thousands of low-income families in new or rehabilitated buildings and helped stabilize neighborhoods, it has been nearly drowned out by the twin waves of gentrification and rent deregulation.
Then, from FDL, in reference to the above:
Mayors like Bloomberg are trying to keep up, but this is clearly a bigger problem than classic development planning schemes can solve.
Deregulation is government policy. Therefore one of the two main factors driving poor folks out of New York is fully something that could be reversed by government any time they want to.
People get awfully confused about what government does and doesn’t do, and there’s little that’s more classic development planning than rent control. Rent control existed exactly to make sure that poorer people weren’t driven out of neighborhoods. Removing it has had exactly the effect anyone should have expected.
Seriously, go read it. Numerian explains where Goldman Sachs’ profits come from. Hint: it isn’t from investment banking or banking of any kind, and it isn’t from traditional trading either.
Numerian is the financial and econoblogger whom almost no one reads, whom everyone should read. He gets almost everything right, long in advance, he understand the intricacies of financial markets extraordinarily well, and he’s good at explaining what he knows so ordinary people can understand it.
Over the last three months, banks put 63 percent of their new cash into euros and yen — not the greenbacks — a nearly complete reversal of the dollar’s onetime dominance for reserves, according to Barclays Capital. The dollar’s share of new cash in the central banks was down to 37 percent — compared with two-thirds a decade ago.
Currently, dollars account for about 62 percent of the currency reserve at central banks — the lowest on record, said the International Monetary Fund.
Let me repeat. Paulson/Geithner/Obama/Bernanke DID NOT fix the financial crisis, they just threw money at it without fixing the underlying problems. Patting themselves on the back for saving the US is entirely premature.
Chicago Dyke has started a conversation about food and obesity in America which led to some amusing denial (though there are some legitimate methodological issues with how overweight is defined.)
But no foreigner who travels to the US has any doubt that Americans are, as a group, fat. I notice it the second I get on an airplane traveling to the US, and I notice it for the trip, and I really notice it when I get home and go on the subway, and the average person is so much thinner. It’s brutal.
Too much of the wrong type of food, not enough exercise. I first noticed it when I traveled to Boston in 05. I was on a corporate account and we ate out every night, and the plate sizes were huge. At first I choked it all down (raised in one of those “clean your plate” households) eventually I just stopped eating it all.
Less, better quality food is far healthier. But less better quality food costs more and restaurants and supermarkets both charge more if you want to eat well.
The rise of suburbs and the car has also left much of the country walking unfriendly, and most Americans get essentially no exercise.
(International airlines put aside more weight for Americans than other nationalities, btw.)
I think a large reason Americans let themselves be abused by their elites is that they are fat and heavily medicated. The number of Americans on anti-depressants (a drug class which is more addictive than opiates, btw) is staggering. You’re drugged to the gills so that you will put up with the way you’re absued rather than taking to the streets.
Being unhappy when your life is shit is natural folks. Drugging yourself to make yourself tolerate is a palliative, not a cure.
And a lot of these drugs also lead to weight gain. Bonus.
Notice that your elites as a group (there are exceptions, like Summers) are not fat. In fact, they are exercise fanatics who watch what they eat very carefully. Between that and actually getting good health care, they live and work into their seventies.
But fat drugged unhealthy Americans are easier to control, so what they do for themselves, they sure as hell don’t do for you.
