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Outsized Pay on Wall Street Persists

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A piece at Bloomberg today confirms that the financial crisis did nothing to shift the gap between what someone can earn on Wall Street versus more worthwhile lines of work:

Wall Street traders discouraged by declining bonuses this month can take solace: They still earn much more than brain surgeons and top U.S. generals.

An oil trader with 10 years in the business is likely to earn at least $1 million this year, while a neurosurgeon with similar time on the job makes less than $600,000, recruiters estimated. After a decade of deal-making, merger bankers take home about $2 million, more than 10 times what a similarly seasoned cancer researcher gets (see table below).

The pay gap between finance and other professions widened between the 1980s and 2006, exceeding the record set before the Great Depression, according to a 2009 study by Thomas Philippon, a professor at New York University’s Stern School of Business. After the 2008 financial crisis, Wall Street started paying a larger portion of bonuses in stock and restricted cash. Yet there’s little sign the gap with Main Street is narrowing.

“I don’t think it’s healthy for the economy to be this skewed,” said Stephen Rose, a 63-year-old professor at Georgetown University’s Center on Education and the Workforce. “I believe there’s some sort of connection between value added to the economy and pay. Everyone is losing sight of any fundamentals.”

It’s important to stress that this is a new pattern. In the stone ages of my youth, top earners in investment banking were on a par roughly with top heart surgeons and when someone became a partner at Goldman, his cash compensation fell sharply. The old line was that partners lived poor and died rich.

And their aspirations were modest by contemporary standards: a nice apartment in the better sections of the Upper East side, having their kids in private schools, and having a summer home, likely in the Hamptons (which were much cheaper then than now).

One of the perverse elements of the pay escalation in finance is that more dollars are being thrown at social signaling. Anthropologists would have a field day. To a significant degree, top end goods have been repriced upwards to reflect competition for the same assets (paintings, luxury goods, prime residential real estate), with admittedly some new creature comforts now on the list (private jets).

But a much uglier element is how this trend continues to suck “talent” into socially destructive activities (if you think that’s an overstatement, read this post from yesterday). And it is becoming institutionalized, not just due to the pay gap between jobs in TBTF financial firms, but also due to the seemingly unending rise in the costs of higher education, well outpacing inflation for more than 20 years. As Jamie Galbraith pointed out in his book The Predator State, there’s a fallacy in thinking that having more people get more advanced education leads them to higher levels of lifetime earnings. While that can be true for individuals, if large numbers of people adopt the same strategy, more credentialing simply becomes a new normal (look at how many college and even advanced degree graduates take jobs that don’t require their level of educational attainment).

So the result is increasingly costly higher education, due to more and more people going to college and grad schools, and students being less price constrained due to student loans. So students who don’t have affluent parents are forced to be mercenary in their career choices or risk having huge problems in contending with their school loans (which can’t be discharged in bankruptcy). A widely discussed article in the New York Times pointed out how law school is now a bad investment, and also described “Enron-type accounting” on behalf of the law schools themselves in misrepresenting the value of their degrees.

So the normal avenues to upward mobility or even normal middle class prosperity are eroding, and demanding and socially valuable careers that were once highly respected are now falling in relative standing in increasingly Plutocratic America. This is not a blueprint for economic success or rising social well being.

Another reflection of this sorry trend was an article in the Atlantic, “The Rise of the New Global Elite,” which was admirably shredded by reader paper mac:

The cherry-picked anecdotes of blue-collar, self made executives used to suggest that entry into the ranks of the ultra-rich is somehow “meritocratic”, despite extensive evidence showing that the relationship between heriditary wealth, education, and socioeconomic status is strengthening; the suggestion that these elites somehow “produce wealth”, despite the clear evidence than in fact most of them do little but extract it; the absolutely laughable assertion that attending elite wank-fests like TED talks or Davos conferences somehow constitutes engagement with serious ideas; the absurdity of claiming that the handful of billionaires with significant philanthropic contributions to their pet causes shows us that the ultra-rich are legitimately attempting to better the condition of their inferiors- I’m amazed this trash got past any editor, anywhere.

Freeland is clearly far too close to her subjects. She spends most of her 7 pages fellating a handful of executives she had access to (include a puke-worthy passage suggesting that Lloyd Blankfein is, after all, just a regular, salt-of-the-earth boy)….

It’s nonetheless worth pointing out a few bits that provide some insight into the psychopathology of the subjects and the author. One that struck me was this:

“The clincher, Peterson says, came from the wife: “She turns to me and she goes, ‘You know, the thing about 20’”—by this, she meant $20 million a year—“‘is 20 is only 10 after taxes.’ And everyone at the table is nodding.””

In what way is this person not mentally ill? In what world is this not simple addiction to money? Who in God’s name needs 20, or even 10 million dollars a year? If we lived in a sane society, this person would be the object of pity and ridicule- someone so completely given over to their wealth addiction that they will literally never have enough. It is people like this who will kill us.

There’s also an interesting fallacy that at least some members of this cohort subscribe to:

Our light-speed, globally connected economy has led to the rise of a new super-elite…Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves.

To the extent that members of this group have wealth that depends on assets or operations located in, say, China or Russia, their assumption that they can operate above states is a tad optimistic. They are effectively projecting their success in capturing the American government apparatus and assuming that other states will also hew to their will. But America is an empire in decline, hence ripe for exploitation. And American has long had plutocratic tendencies, while the elites in other countries, notably China are keenly sensitive to foreign exploitation, having been on the wrong side of that trade far too often, and are likely to turn the tables outsiders once they cease to be of use to them. They probably won’t wind up as badly as Mikhail Khodorkovsky, but their optimism that they can continue to operate unfettered, beyond the reach of governments is more than a tad optimistic.

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46 comments

  1. MyLessThanPrimeBeef

    I believe the medieval name for ‘trick down’ is ‘droit du seigneur.’

    The lord gets the first shot at the maiden and then passes on down to the peasants.

    Cruel and inhuman indeed.

  2. vlade

    “they will literally never have enough”
    Indeed, because it is all, as Yves points out, about social signaling. It ceased to be about money (as means of getting something else) quite some time ago.
    Long time ago, the social signaling was about who your grand-grand-grand… -grand mother slept with (or something similar), but given the inbreeding of population, that sort of stopped working (say if you’re at least part European, it’s virtually certain that Charlemagne was amongst your ancestors, just by the law of large numbers).

    On the other hand, unless we invent a different way of social signaling, I doubt it’s a problem that can go away. And, given that it would have to be signaling that money can’t buy, it’s damn hard..

    1. Jim A

      Well to a very real extant, when the marginal rates were much higher, the DID have other means of social signaling. It was to some extant, more about the exclusivity of their country clubs, or getting things named after them, than just adding more zeros to their income. It’s not that the rich weren’t exclusionary and protective of their priviledge, it’s just that they had other means of keep in score and counting coup amongst each other.

  3. bmeisen

    I suggest that higher ed in the United States may not be over-priced. Could elite universities charge more than 50k/yr and still attract sufficient numbers of applicants? The answer may be yes, if for example we posit that their product features include admission to the ruling, hyper-monied class. If there are sufficient numbers of applicants who are willing and able to pay substantilly more than 50k for an elite degree then are the elite organizations under-pricing their products?

    I suggest that there would be at least 3 reasons for them to underprice:

    1. To disarm criticism of their marketing, i.e. of their target group setting – at 50k they can still claim to be a stretch for middle class Americans.

    2. To limit questions about non-profits with large endowments.

    3. To maintain market power. Elite organizations control the price of higher ed in the USA. If they were to charge the price they could get they would de-couple themselves from the pricing of other institutions and allow brands to develop that could threaten the long-term dominance of the elite.

      1. Dennis

        I think you are wrong. Entrance to a specific college or law school is exactly how you enter this ‘hyper meritocracy’ if you arent born into it. the top 1/3rd of the class at Princeton or Harvard, if they wanted to, can go work in a bank or a hedge fund and get a lot of money.

        Ditto about that law school are a scam thing; they are scam, unless you got into a top law school and finished in the top 3rd of your class. Then you are probably alright.

    1. mannfm11

      I don’t believe in elite educations. I believe these people are a cartel, that if you get in, you join the cartel. That is, if you can fit in the cartel. I have a cousin that is a judge. His daughter went to law school and landed a pretty good job out of school. No telling what her connection to the judge had to do with her getting a job, but I would venture she had some contacts. Her father wasn’t so lucky in private practice. The kid started out at the fathers judge salary.

      I went to college, got out in 4 years and hardly studied. But, the different group projects showed I was near the top of the class in what I was able to put together in my education in finance. The cost was next to nothing in the 1970′s. Relative cost is about double today.

      The big problem is that the central bank of the US is over a barrel with these guys. Had Rubin and Greenspan not enabled this stuff in the late 1990′s, few of these people would be making squat. Their game is issuing debt and manipulating markets and anyone that deals with them is going to pay the price. They send people into government to further feather their nest. Normal Americans can’t see past what is going on. But, then again, many of our jobs now hang in the balance due to what these criminals have done.

  4. PQS

    To the extent that The Atlantic article reaches a wide audience (a feat by no means assured), perhaps some reality will begin to seep into the consciousness WRT “just how wealthy” the obscenely wealthy are. I believe most Americans think that “the wealthy” are people like their boss (not Lloyd Blankfein), but say, a guy who runs a car lot or a construction company. Maybe even the top of the local insurance company or something, or a CEO they read about for a local outfit.

    They have NO IDEA that these people, whom they would consider to be very wealthy because they are pulling down six figures (or maybe just 1M), are minnows in the world of the Obscenely Wealthy.

    Until we break this illusion, very little will change, I’m afraid, and few Americans will realize how deeply they’ve been hoodwinked – and by how few thieves.

    1. readerOfTeaLeaves

      Agree.

      And just as anecdote, last summer I was in a rural, ag community. I could tell the public mood was souring when people said – partly under their breath, with their eyes rolling – that they’d lost $150,000. Knowing these are stoic folk, I assume if that’s the number they were willing to state publicly, they probably lost several multiples of that figure, but would never admit what they’ve actually seen evaporate from portfolios nurtured over 25+ years. But to them, ‘rich’ means a million. Really, really rich means five million. When they start to realize the numbers involved in the Wall Street bonuses, I see political implosion.

      There is on conceivable way, even if PR firms stretched to the next galaxy, that Wall Street will ever explain to these folks what they do to ‘earn’ their incomes.

      Show’s not over yet, but I see last Nov elections as not so much about ‘jobs’, but rather still amorphous wrath about economic inequality and fury about government being handmaiden to banks. If “Accountability” were listed on any exchange, I’d buy. Big Time. I think it has a very promising future.

  5. ChrisPacific

    I think to some degree this is an inevitable consequence of measuring self-worth by how much money we make. This is a common viewpoint in much of Western society, especially in the USA, and not just among the elite. The goal of earning money is not to cover your expenditures, but to prove your worth as a person. The more money you earn, the better (and more successful) a person you are. If you earn $20 million a year while your friend earns only $2 million, you are ten times the person that he is. On the occasions when NC has been trolled by Wall Street types in comments, they have sometimes said this in as many words (e.g. by speculating on the puniness of other commenters’ net worth, in the confident expectation that this will be taken as a mortal insult).

    I think this is also why some professions such as teaching are not highly regarded by a certain segment of society. People often become teachers because they believe it’s an important job and they want to make a difference, but that increases supply and drives down salaries, so teachers don’t earn much compared to many other professions. This leads to them being devalued under the line of thinking above (“Those who can do, those who can’t teach.”)

    For people like this, there is no such thing as enough when it comes to money, since the accumulation of it amounts to the betterment of oneself as a person. I believe it also helps explain why they seem so impervious to criticism and blind to public opinion at times. Only people who have demonstrated their value as a person (i.e., other super-rich) are worth listening to. You wouldn’t bother listening to the opinions of the poor any more than you would invite a kindergarten student to speak at a conference on theoretical physics.

    People like this are the inevitable outcome of a society that uses wealth as the primary measure of self-worth. They may be monsters, but we created them.

  6. ScottS

    One thing that gives me hope is that for most people under the age of 30, the only high score that means anything is not denominated in dollars, but in points, levels, etc. And having a high score in a video game doesn’t deprive anyone of food or shelter.

  7. Tom Crowl

    You just have no idea how dis-heartening this is and what it does to a culture and the drives within it… and to people who want to really create a better society for everybody.

    For just a minuscule percentage of one of their bonuses there are developments that could be launched to greatly benefit our own fellow citizens and their ability to have a place in the political landscape that is crushing them without recourse.

    A Citizen’s responsibility in an area is directly proportional to his or her ability to have an effect. Without improvement in mechanisms of meaningful involvement, we will see a continued growth in apathy, frustration and ultimately a resort to less healthy forms of expression.

    Does the leadership of the political parties really want a more level playing field?

    Of course they do! In fact they also oppose Gerrymandering and the revolving door… just ask ‘em… they’ll tell you!

    In fact they’ve been telling us how much they want good government and how much they hate special interests for the last 40 years at least. I’m sure they’ll get around to it soon. Must have slipped their minds.

  8. Sunny

    @PQS

    ‘Until we break this illusion, very little will change, I’m afraid, and few Americans will realize how deeply they’ve been hoodwinked – and by how few thieves.’

    How do you think this illusion will breakdown? Financial literacy among the population is limited. Look at daily brain wash from MSM.

    I am quite pessimistic in this regard! we are heading towards inequality like a in third world country.

    Aldous Huxley describes the American choice to be ignorant:

    Most ignorance is vincible ignorance. We don’t know because we don’t want to know.

  9. Lune

    Actually, the brain surgeons are getting wise too. While the brain drain from physics, math, etc. to Wall St. has been widely documented, my anecdotal evidence in talking with young medical students and resident physicians is that a surprising number of them (especially ones from east coast schools) are planning to enter the financial industry, either directly in trading operations, or in health and technology-focused hedge funds, private equity, and venture capital.

    It seems the economic landscape of the health care industry, with its quaint non-profits, small practices, and research-driven startups, is viewed as the next frontier for Wall St’s slice-and-dice “efficiency improvements”.

    1. mikkel

      Precisely. Even the Bloomberg article is a canard because it is talking about “average” pay…well the pay range of the professions they talk about are highly compressed compared to the financial industry. What is so destabilizing isn’t just the high guaranteed pay if you can break in (even though that is a huge part of it) but the allure of unimaginable sums of money if you can make it to the top.

      In science or medicine or the military the historical rewards for being the best have a monetary component but are primarily about status and respect. Those rewards don’t hurt everyone else because you can increase your respect without having to increase your fees on society in general. But now with the financialization mindset becoming so pervasive, even in those fields respect is becoming synonymous with whether you can turn your work into $$$. These days a lot of performing the job is a formality until you can make it rich by becoming a lobbyist or having your startup bought out.

      1. Lune

        That’s a good point.

        The salary range for neurosurgeons is probably between 300k to perhaps 3mil (*very* infrequent). A difference of 10x from lowest to highest. OTOH, the salary range for finance types is probably between 300k to 3 *billion* (a la John Paulson), or 10,000x.

        With such a compressed salary range, at least a portion of a neurosurgeon’s professional success is defined by non-economic assets e.g. academic credentials, peer recognition, etc.

        But like I said, this is changing, as America’s notion of success becomes strictly a dollar-denominated scale.

  10. sglover

    About that Atlantic piece: Don’t forget, this is a magazine that “employs” Megan McArdle AND Andrew Sullivan. If the American Dream is rising ever upwards through professional failure and intellectual dishonesty, those two embody are practically pioneer stock.

    Anyway, it was interesting to read about the business genius of Viktor Pinchuk. Before I that Atlantic piece, I was pretty certain that his biggest “innovation” was marrying the daughter of Leonid Kuchma, Ukraine’s former president (read: larcenist-in-chief). I guess there are many paths to being a self-made man…..

  11. Tertium Squid

    I’ve been pondering the recent shooting, and mention of the the peculiar fate of Mikhail Khodorkovsky gives me an opening to share some opinions.

    There’s something that I believe US administrators and elected officials overlook as they continue to impose a police/surveillance state and rely on violence (and the threat thereof) to solidify their power and resolve even banal problems. It is that violence as a policy can be used by whomever has control of the reins. And an official who feels like they are a valued part of the system can find out swiftly and catastrophically that they are actually a “terrorist”, and treated thus.

    Russia’s a wonderful example. If Vladimir Putin were assassinated it would be a shock, but only because we assumed he’d have protected himself better. Violence is his stock and trade, and one would not be surprised that the methods he’s using might someday be used against him by the very state machinery he struggles so to control. Same for anyone under him who thought he was safe.

    Do they realize that they are Living by the Sword? What’s the other half of the axiom?

    When will America have its Night of the Long Knives?

    1. Tom Crowl

      You make an important point!

      And it can involve a lot more than shootings… as horrible as those are.

      Technology is advancing in ways that will soon make drones available to the creative terrorist… not to mention basement bio-weapon labs, cyberspace vulnerabilities… and on and on.

      I’ve suggested that the increasingly vulnerable systems upon which high technology civilization depends…

      Stirred by the explosive expansion of ICT… (the connected world!)

      With a large dollop of the Ultimatum Game (“This deal is so bad I’d rather tip over the board and take nothing than accept that!”)

      All mixed into an over-burdened pot (earth’s biosphere)

      Makes for what the Chinese call “Interesting Times”…

      And makes the “justice imperative” absolutely… well… imperative!

    2. bob

      Russia was also on my mind recently. We all know of Mr. Putin’s connection with the KGB etc…

      Are we really that different here in the US? The first Bush was head of the CIA. He may have not been “renewed” but it seems his power structure was well intact after he left office. Isn’t this what the western press accuses Putin of, with a much smaller time sample.

  12. Liminal Hack

    Frustrating as the ongoing (seemingly unstoppable) dominance of the banking industry is, has anyone stopped to consider that this is their last hurrah? And not because we face imminent collapse or because some politicians or main street plebs are about to get tough, but because outsized bank profits were a feature of a multi decade credit expansion.

    Whether we remain at a peak debt equilibrium as I have argued, or whether there is a genuine deflationary collapse, bank profits won’t obtain from flat yield curves, which is the outcome in either case.

    For example:

    http://www.zerohedge.com/article/treasury-curve-pancakes-again-bank-profitability-goes-out-window-making-curve-flatter-still

    Those wishing to see a reduction in the obscene remuneration in the banking sector ought therefore to be calling for a flatter yield curve, and that means more QE, or better, a fiat limiting of bond yields.

    1. mannfm11

      QE is feeding these guys. Also, it is creating inflation, which will steepen the yield curve. The Australian carry trade is about to reverse on these guys and I doubt the typical Australian is going to be too concerned with bailing out foreigners. Ireland may throw the entire machine a curve and just tell the ECU to go to hell and set an example already set by Iceland.

  13. madrona

    I don’t mean to misread this: “To the extent that members of this group have wealth that depends on assets or operations located in, say, China or Russia, their assumption that they can operate above states is a tad optimistic. They are effectively projecting their success in capturing the American government apparatus and assuming that other states will also hew to their will.” It seems to imply that the transnational elite are themselves all Westerners. Apologies, I haven’t read The Atlantic article, but this is something I’ve observed over the past few years while living in the world’s largest so-called developing nation. In my own observations, such an elite is well in place and comprises people who are from their host nations, but have been educated overseas. They have more in common with people of similar educations, credentials, and experience as their own than they do with their countrymen. So they may be from, let’s say, China, but they’ve been educated at Harvard or Columbia or McGill or the LSE, wherever; and they work for MNCs or top-brand law firms or the Big Four in their offices at Beijing or Shanghai; they drive European sedans, stay at five-star hotels, and take coffee at Starbucks. But they’re still Chinese; maybe they’re members of the Chinese Communist Party, as are their parents; their parents or grandparents may be generals or ministers of this or that. They may be in positions of influence with state ministries, and perhaps a post at a state-owned enterprise is in their future, if they aren’t there already. So to the point, how does the existence of a transnational elite imply foreign capture? These people may have foreign credentials, but they aren’t foreigners. They may more than occasionally demonstrate provincial attitudes, even while collaborating with overseas peers and benefitting from those relationships. It seems to me that the whole idea of a transnational elite is that it completely subverts national boundaries and institutions to the needs or ambitions of a class of people who *were already there*, but now have linked arms with privileged classes in countries overseas to coordinate business, policy, and what-have-you. You don’t need to be a conspiracist to view things in this way; it’s an self-enlarging edifice resulting from innumerable marriages of convenience.

  14. Kujiranoai

    I just wanted to say thanks to Yves for being one of the few commentators in the financial area who are a beacon of humanism and common sense in times which are becoming increasingly free of hope.

    My un-scientific opinion is that the trends touched on here – increasing inequality, the seemingly inexorable rise of the super-rich at the cost of broader society, denial of equality of opportunity in education, the parasitism of the financial sector – are becoming increasingly difficult to reverse even if there was the political will and power to do so, leaving only the possibility of more violent reversal through revolution or similar which seems very unlikely.

    I really think recent years have seen the start of Americas decline and we are now in danger of seeing that decline accelerate rather than reverse.

    In past ages the ideals and ambitions of immigrants into the country might have counterbalanced the damage to the economy and society arising from a parasitic, rich elite but the opporuntities for an immigrant into American now seem practically zero, especially when compared to those of an immigrant 100 years ago.

    Where once America stood for ideals of freedom and democracy it now stands for the compromise of those ideals for short term or selfish gain given the “Bush torture years” and the lack of reasoned and intelligent political debate given Fox News and the like.

    It is very saddening to see a once great nation brought down as its social institutions and values are slowly undermined by a greedy and rich elite who are concerned with only their own wealth and power and care nothing for their country or the rest of humanity.

  15. jules

    Don’t know about your “peak debt equilibrium” argument, but wouldn’t real estate prices need to be stable before any equilibrium could set in? Or are you assuming government subsidies to prop up housing? And with the banks still able to collect outsized service fees as they engineer the foreclosures to their best advantage over the interests of the MBS investors, I don’t see too big a decline in bank exec bonuses.

    “Whether we remain at a peak debt equilibrium as I have argued, or whether there is a genuine deflationary collapse, bank profits won’t obtain from flat yield curves, which is the outcome in either case.”

  16. Jojo

    The reason that Wall Street can pay such high salaries and bonuses isn’t because they do anything particularly special. No, they can do so simply because they are able to charge TOO MUCH for their products/services. But their customers don’t seem to mind paying the rates they are charged. I can only guess this is because each middleman pushes the overcharges further downstream while also adding a little more to compensate themselves.

    However, eventually the push down reaches the end of the line. That end unfortunately, is either individual investors who pay too high prices or entities like government that themselves pass the overcharges onto the taxpayer. Product pricing in the financial world is corrupt from top all the way to bottom!

    If people want to reign in Wall Street and financial industry pay, the most straight-forward way to do this is to force a reduction in prices that they charge for the services they render. Instead of making 2 cents for each stock share sold or bond brought, maybe they make just one cent. It doesn’t have to be any more complicated that this!

    1. liberal

      Yes, it’s all about rent collection.

      What I want to know, though, is a question implicit in your comment: who are the customers paying all this rent? Yeah, we don’t have much choice but to use banks, but I don’t think that’s the main source of it. My impression is that there’s people acting “on our behalf” (pension administrators, municipal governments) who are responsible.

  17. Jojo

    “One of the perverse elements of the pay escalation in finance is that more dollars are being thrown at social signaling. ”
    ==========
    Which is no different that how it always has been. Money has always brought social standing. See this famous short story from around 1925 for example:

    The Rocking Horse Winner
    DH Lawrence
    http://www.dowse.com/fiction/Lawrence.html

  18. Hugh

    So many point to income inequality but it is wealth inequality with its resultant tying up of a majority of the country’s resources in the hands of a very small unproductive few that is killing us. The reason that there is no money for jobs, healthcare, education, infrastructure, state budgets and retirements is not that the money is not there. It is that it has been stolen by a wholly parasitic rentier class that can’t stop or restrain its stealing. Kleptocracy, like rust, never sleeps. It will eat away at the structures of our society until it all falls in. Ultimately, this is a self-destructive process. It is deeply irrational, even pathologic. But then so is the absence of opposition to it.

  19. Dennis

    Uhm…to the people suggesting that somehow China/Russia are different…You need take of your naivety glasses…

    Khodarkovsky and a couple of others were broken but the majority of oligarchs are alive and well…

    How about the latest wikileaks cables pertaining to China’s CCP ???http://www.telegraph.co.uk/news/worldnews/wikileaks/8184216/WikiLeaks-Chinas
    -Politburo-a-cabal-of-business-empires.html

    Or to several FT articles about Chinese ‘prince-lings’ and their propensity to venture into private equity in China? http://ftalphaville.ft.com/blog/2010/02/24/144931/of-princelings-turtles-and-chinese-private-equity/

    1. Yves Smith Post author

      The state will still put oligarchs in line. What happened to Khodarkovsky is impossible in America.

      1. Dennis

        Hey Yves,

        First, great site!

        But second, you have to look at it in context. The difference between Khodarkovsky and your oligarchs was that in 98 the security forces inserted their own guys into power. America is like a much richer and more stable of Yeltsin’s Russia. Where business oligarchs have a free hand. But also where the laws were not designed by communist aparatchiks and therefore at worst most of the crimes bankers can be accused of would be securities fraud.

        For there to be a Khodarkovsky situation would require some sort of law and order type politician being elected. He would then sacrifice a couple of oligarchic goats to the masses. But other oligarchs would keep on churning. So lets say oil goes up to 200 bucks a barrel, some sort of law and order guy comes in and breaks Exxon for its ‘gouging’ of the public. But Goldman would still remain.

  20. Nick Danger

    This discussion boils down to a few simple elements…..

    1) Any exec knows that people with incentive based compensation will work their comp plan to do whats best for them…to do otherwise would be absurd.

    2) It is the execs that write these incentive based comp plans so that they feed their own incentive based plans, which their boards approve.

    The driving elements of these plans are either in synch with corporate goals or they are not. If they are not, then why have them?

    As long as the corporate goals are being met, then it is up to either the shareholders or the boards / ownership to recast these goals into something more socially acceptable so that other behaviour is rewarded that addresses that change.

    If shareholders want more socially responsible compensation, they dont ever seem to vote for it….in short shareholders want what is good for their wallets first (for the most part) and what is socially responsible a distant second…..

    The two drivers here are very difficult to align….but if it si to be so, it is both a bottom up and top down effort…and there are very few executives that can navigate those waters.

  21. Rodger Malcolm Mitchellr

    This is just another version of the old story about how outrageous it is that pro baseball players make more than teachers. Come to think of it, pro baseball players make more than most Wall Street traders, too.

    Get used to it.

    1. liberal

      Difference is that pro baseball players aren’t collecting rents (except for bullshit gov’t subsidies of stadiums that trickle down to the players). Yes, I know that the economics profession has tried to redefine rent to include well-paid sports stars, but it’s balogne.

  22. Ellen Anderson

    I am still laughing over the Atlantic Monthly article. I hoped someone would pick it up and laugh (or cry) with me.
    We need to figure out how the states could go about revoking the charters of corporations. I am not saying that anyone could do it right now but that is what needs to happen in the long run. There is no way to reform or regulate entities that we have defined as persons who are immortal and required to act like psychopaths. I know this has been said before but we need to get serious about charting a path towards that goal.
    If a corporation were threatened with loss of its charter by removing jobs from the US to China, it might think hard before doing so. Right now, we have placed them outside of political control. Both the Democrats and Republicans are their facilitators.

  23. emca

    Maybe arrogance is a counterpoint to inherent worthlessness, venal fantasy festered in fear of recognition of vacuity of vanity; unspoken but known.

    The person of Lloyd Blankfein, that blue-collar prodigy, serves the primary character flaw in an elite’s world-view of self worth.

    A man of minor technical talent, with no upper social legacy to barter, whose main qualifications appears to be the ability to manage money, or the ability to manage people who manage money (or more cynically, being at the right place and/or being able to court favors from superiors), whose sole claim to social notoriety and status is compensation for his effort forwarding these tasks is a statement of values of the system; that money/compensation is your worth and reflects no other intrinsic value, therefore exclusive of any talent, any socially redeeming act of work engaged in, any prominent name, there remains, the more have the better person you are.

    In a system of old aristocracy one could claim social superiority based on inheritance. In modern aristocracy, the nouveau-rich, you have monetary wealth whose necessity in excess is no better than the former.

    The end result is the same, the transfer of a nation’s wealth and status to people of little merit. When such gains are excessive, either the system readjusts or collapses.

    1. Dennis

      Most aristocracies only collapsed because of external pressure. If Spanish silver hadnt flooded into Amsterdam and allowed the Dutch to create a noble-less merchant Republic odds are that most monarchies and aristocracies would have still been around.

  24. emca

    The notion of internal or external factors to aristocratic failure, or more accurately the collapse of government supporting such a system, whether the aristocracy is whole or significant part is debatable, but it doesn’t change the affect; the wider spread between the greatest and least and its corrosive effects on society.

    While some nations find the means to adjust to this unbalance, some never face the social distortions to begin with, yet others falter in arrogance of its implications. If the new aristocracy isn’t forced to gradual correction (note I use the same term “aristocracy” with two differing meanings to reflect the context), then the alternative would be increasing systematic ‘dislocations’ culminating in replacement of whole aristocratic edifice.

    I don’t see this radical upheaval per France circa 1800 or Russia circa 1900 happening in the U.S. today, but the trend will need to be addressed. There is no self-correct mechanism to otherwise counter the increasing concentration of wealth, unless of course you dwell in dogma of trickle-down, by which yes, the rich will have to be made richer, for their and society’s own good.

    1. Dennis

      Sorry but you are wrong. Unless there is an outside push against such an aristocratic edifice this will not happen. Aristocratic systems are incredibly stable and self perpetuating and hence they existed for the vast majority of organized human existence.

      1800 France and 1900 Russia collapsed because of outside pressure, a better organized state inflicted repeated defeats on both states which led to their collapse. Just as important, in the case of Russia and France, there was an outside ideology that provided a guiding light to the rebels against the status quo. But today there is no real alternative ideology in the developed world — Communism is dead, anarchism seems scary and barbaric and religious fundamentalism simply does not appeal to the majority.

      Again — just think back to history and every example of an aristocratic regime being overthrown. Almost always outside pressure, via a better organized, predatory and technologically superior state, is required before internal pressure is galvanized enough to react. And even then, it is a close fight.

  25. Ellen

    It’s such a sad statement that traders make more than neurosurgeons. Because if you are ever in need of of neurosurgeon, you only want the best.
    I am alive today because of a neurosurgeon and he didn’t get a bonus for that.

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