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The Specious Logic of Wall Street Pay

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It’s remarkable how Masters of the Universe, the new financial elite first identified by Tom Wolfe in 1986, remember nothing and regret nothing. And why should they? Their position remains remarkably secure 25 years later.

We see the “Who us, take responsibility for our actions?” stance in full view courtesy one of their most effective spokesman, Steve Eckhaus, an attorney who has negotiated many big ticket Wall Street compensation contracts. From the Wall Street Journal:

“It was understandable why there was anger,” says Mr. Eckhaus, but “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”..

In general, he said his clients are “pure as the driven snow” and doing work that supports the economy and justifies their pay….

“You have to know what the profits are” to know what someone should make, said Mr. Eckhaus, noting Wall Street’s top performers usually gobble up 80% of the bonus pool. “Those who are responsible for profits should share in the profits in a way that rewards them.”"

This is the usual “heads I win, tails you lose” logic. The rationale for bulging pay packets is that the producers created it, therefore they deserved their cut. But Eckhaus says any bad events are due only to bad luck. Sorry to tell you, but only narcissists and their agents take credit for good stuff and lay the blame on everyone else. Unfortunately, we breed for that in Corporate America, it happens to be a very effective career strategy in large organizations. The New York Times even went so far as to identify “acquired situational narcissism” as a danger afflicting high profile people surrounded by groupies and sycophants.

Where has the old fashioned notion of leadership being tantamount to responsibility gone? Captains famously are supposed to go down with their ships; Truman’s most famous saying was “The buck stops here.” And Jim Collins, in his classic book Good to Great, found that in his group of long term outperforming companies, the CEOs all had the same style, and it is the polar opposite of the CEO from central casting. They paid themselves modestly, did not take credit for successes, and were quick to take the blame for bad outcomes.

So it isn’t surprising that the pathology that Eckhaus promotes and profits from has led to IBG-YBG (“I’ll be gone-you’ll be gone”) abuses, like phony year end marks (due to traders “marking to myself” or executing transactions with complicit colleagues at other firms), gaming of bonus systems (the negative basis trade played a direct role in precipitating the crisis) and accounting fraud (Merrill’s Pyxis deals, Repo 105 at Lehman, and Citibank’s failure to disclose its CDO positions have come to light; there’s no doubt a lot more than hasn’t).

And the idea that the rich pay of Wall Street producers is truly their own output is in many cases a convenient bit of PR. There are some specialties in large firms, such as M&A bankers with their own clients and reputations, who have a proud tradition of setting up their own shingles (many do well on their own, but there have also been some noteworthy lackluster efforts). By contrast, traders are often the most insistent in their belief that their P&L is really their doing (at Goldman, the traders call investment bankers “socialists” because they work on teams and are paid on department as well as individual output). Yet that belief does not stand up to close scrutiny. As we noted in ECONNED in our discussion of Andrew Hall, a famous trader at Citigroup who proved to be an embarrassment due to his receiving over $100 million as the head of an oil trading group and had his business eventually bought by Occidental Petroleum:

Phibro, along with its richly paid chief, Andrew Hall, is leaving Citigroup for Occidental Petroleum. The price Oxy paid for Phibro was only the current value of its trading positions–liquidation value and not a brass razoo more. There was NO premium for the earning potential of Hall and his supposed money machine. It’s not hard to see why. Hall’s returns were heavily dependent on high leverage, cheap funding, and market intelligence from other trading desks, all huge subsidies from Citigroup. In turn, these concentrated capital and information flows do not come about naturally, but are the product of industry-favoring policies.

His example illustrates that the widely proclaimed view that highly profitable traders are worth their exorbitant pay is often a fiction. The fact that no other buyers, not a financial firm, commodities trader, or consortium, stepped forward when Citi was looking for a graceful exit shows that the business was worth very little on a stand-alone basis.

This isn’t just my view; former Goldman co-chairman John Whitehead decried financial services pay levels for bonus year 2006 as “shocking” and criticized Goldman: “They’re the leaders in this outrageous increase.” But pay levels have only risen since then, with only a brief, “Gee, we blew up the global economy” respite in 2008.

Eckhaus is at least openly and unabashedly part of the problem. What is distressing is that people on the wrong side of Wall Street’s self-serving stance, or those who at most get crumbs, also defend this anti-capitalist arrangement. Unfortunately, it will probably take another financial crisis to shake these Stockholm Syndrome victims out of their acquiescence.

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82 comments

  1. Jojo

    I still contend that workers on Wall Street are able to make so much money because they systematically overcharge their customers, most of whom then turn around and overcharge their customers to compensate for getting screwed by the Wall Street firm(s) they do business with. Eventually, the bubbling down overcharges wind up getting pinned on the final buyer (who might just be a taxpayer).

    Find a way to force Wall Street to lower what they charge for their products/services and the pay/bonuses they dole out to their workers will then go down also…

    1. kievite

      I still contend that workers on Wall Street are able to make so much money because they systematically overcharge their customers, most of whom then turn around and overcharge their customers to compensate for getting screwed by the Wall Street firm(s) they do business with. Eventually, the bubbling down overcharges wind up getting pinned on the final buyer (who might just be a taxpayer).

      It’s more complex that that.

      Computer revolution was an important factor as it permitted pretty sophisticated looting, not possible before of purely technical grounds (HFT is one example).

      Retail brokerages vastly increase the side of plankton on which large financial institution feed.

      Conversion of 401K plans from a form of executive compensation into replacement of pensions was another important factor. Another dramatic increase on the size of plankton.

      If I remember correctly this bonus extravaganza started during Dot-com boom. So envy toward the start-up founders who often became multi millionaire in three-five years was a factor. Even some mediocre folks often walk out with more a hundred million dollars during dot-com boom. In a way, dot-com boom/bust cycle was a training ground for all those excesses we have now.

      1. readerOfTeaLeaves

        Yup, computers + networks + what Ritholtz has called ‘Wall Street’s Dot-Com penis envy’ have fed a lot of pathology and delusion.

        I also find the timing of statements like this, coming hot on the heels of the release of the FCIC report that clearly states this was clearly attributable to human errors and fraud, mighty… ‘interesting’. I guess they think we’re all a bunch of flies and if they put out a pile of b.s., that we’ll all land on it.

        I don’t think it’s going to work out that way, but it won’t stop them from trying. And the cynic in me is going to sit back and watch them get more and more shrill… I’m storing up extra popcorn ;-)

        1. kievite

          I don’t think it’s going to work out that way, but it won’t stop them from trying.

          Government and banksters are linked in very profound way. That’s why excesses are covered and de-criminalized. John Merryman at 6:59 am provided an interesting biological analogy that “government is equivalent to the central nervous system, while money and banking is equivalent to the circulatory system”

          So from this point of view we have something like leukemia, treatable but very dangerous cancer of the circulatory system. Even symptoms are similar: feeling weak or tired, loss of weight and muscle mass, pain in the joints, etc.

    2. mannfm11

      I have to believe they make money by assisting others in fraud and looting companies they work for. The majority of business done by these firms provides little to enhance the true value of the economy. They are money changers in the temple. That is not to say that the basis of raising true capital financing isn’t of value, but putting together money to inflate assets is a damnable economic offense.

  2. Diego Méndez

    It’s time for DownSouth to repeat its famous, excellent quote on the specious logic behind the privileges of the privileged few.

  3. Commiemaniac

    The good news is that it’s only a matter time before the next crash and leg down – just as the harshness of our third world reality starts to bite. Next time we will kill them all.

  4. attempter

    Those who are responsible for profits should share in the profits in a way that rewards them.

    I agree 100%. And since those who work generate 100% of the wealth, the workers must keep 100% of the wealth.

    As for absolutely worthless criminals and parasites like Eckhaus and everyone else in the finance sector, they should simply cease to exist. They’re not entitled to literally one crumb of food or one BTU of heat or one square foot of shelter, and should receive none. On the contrary, they’d have to perform the hardest labor for thousands of years to restitute all they’ve stolen.

  5. DownSouth

    The only way to look at this is through the prism of the Matthew Principle and Marx.

    From Marx we get insight into society’s corrupt structure, that is how its institutions—-laws, political parties, churches, schools and universities, media, think tanks, etc—-can be corrupted in the service of the rich. The Wall Street bankers don’t receive their bloated pay packages because they are more intelligent, work harder or produce more than other people, but because they have conducted a protracted, multi-generational battle to corrupt society’s structure. Their only talent, the only area in which they truly excel, is in manipulating society’s institutions.

    The Matthew Principle—-the mechanism by which the rich get richer and the poor get poorer—-lends an aura of inevitability to this process. But there is a way to stop this process constantly breeding inequality, and that is by either abolishing private property altogether or by abolishing the right to inherit it. Some people are hardworking, others not so; some are smart, others dumb; some are lucky, others not. Such differences between people result in different rates at which they accumulate wealth. The institution of private property then stores wealth differences, and the institution of inheritance transmits across generations.

    But wealth, that is economic power, also conveys political power. The constitution of the marketplace offers not one person, one vote; but rather one dollar, one vote. The end result is that not only economic power, but in addition political power, end up getting transmitted across generations. Not only economic power, but also political power, snowballs across generations. And this political power is used to progressively corrupt society’s institutions even further.

    Halting this snowball effect has proven all but impossible, and historically the only way it has been halted is when the social structure becomes so corrupt that it falls in upon itself.

    There are of course ways to ameliorate the Matthew Effect without the complete abolishment of property or its transmittal across generations, and that is through high income and inheritance taxes. However, once equality, both economic and political, has become too great, and society’s structure too corrupted, these necessary correctives become politically impossible to enact.

    1. Crazy Horse

      We simply need a shift in the way prestige is measured. Rather than awarding prestige by counting up the number of gold plated toilets in the 30,000 sq. ft fifth home or the number of digits in your bank account, I advocate a return to the Pacific Northwest Indian tradition of the Potlach. He who wins is not the one who dies with the most toys, but rather the one who throws the biggest party and gives the most away.

      Since Capitalist Man has little chance of evolving such civilized traditions, I’ll be satisfied with a 100% inheritance tax for a start. Let’s give the crack dealer in the Bronx the same chance to better himself as Bill Gates’ kid. Distribute an equal portion of the proceeds to every young person in the land at age 24, after they’ve had an opportunity to develop the maturity to use it wisely.

      If wishes were wings pigs could fly. Guess we’ll just have to take back what is rightfully ours—.

      1. avgJohn

        Exactly!

        Public admiration should be directed towards companies and executives who are creating jobs and opportunities at home and they should be rewarded and compensated accordingly.

        I don’t expect these large companies and executive to ignore the advantage of global trade and economies of scale, I just wish they would begin publicly defining and lobbying for the sort of changes they feel we need to begin to rebuild our industries here at home. Sort of beginning a negotiation process with the little people (I’m being realistic here, it should be obvious to all that they hold the power). Both worker and executive management each giving and taking a little.

        But I fear that their investments are too deep, rewards are too great (for them), and operations too entrenched in the present global model for these multi-nationals to take that sort of risk. It will probably all have to completely collapse before we see any real “change you can believe in”.

        1. avgJohn

          Sorry, my response was to a different comment on a different thread.

          I am chuckling at the gulf between your comments and mine. I guess there is more than 1 way to solve problems we just need to do it.

  6. craazyman

    “You have to know what profits are . . . ”

    ha ha ahaha ahahaha hahaha!!!!

    This is better comedy than Chris Rock, Eddie Murphy and Richard Pryor all combined! Three generations of comic genius and this dude tops them all in one line.

    These fellows are the Master-baiters of the Universe.

    I guess when you counterfeit credit, buy-off regulators, stuff your customers, stiff your creditors, convert your pile of toxic collapse into a bank holding company and then get bailed out by taxpayers and by the kindness of helicopter-Ben-the-Money-Drug-Dealer Ber-nank, you know what profits are.

    Because you don’t have any? LOL. Oh, my, I forgot the part about abusing and twisting accounting rules until they look like a Yoga Pose.

    No, it’s that they know what Losses are and how to make the rest of us pick up their tab.

    Seriously Mr. Eckhaus. You are either a Liar in this case, or a complete Fool. I suspect it’s a bit of both. Although any joke is on us.

  7. John Merryman

    The fact is that he is right. Society treats money as a store of wealth, rather than a public economic contract. These bankers are tasked with maintaining the fiction that amounts of capital supply, far above any viable demand, can be effectively kept in circulation. If we treat society’s wealth as private property, those managing it will get first rights. Much as a successful ball player will get the rewards and unsuccessful ones don’t.
    The joke is the idea that capitalism is synonymous with free markets. Capital is subject to the law of supply and demand and since those with supply have political leverage over those potentially needing it, they constantly need to keep moving on to fresh borrowers, as they suck the old ones dry.
    A market needs a medium of exchange and when a private party controls that medium, they control the market. Now it is set up that the public is responsible for the currency, while the private sector banks get the rewards of managing it.
    A biological analogy is that government is equivalent to the central nervous system, while money and banking is equivalent to the circulatory system. They don’t have to be the same function. We know politicians can’t be left in control of the monetary system and now we are learning that private banks have flaws as well. We rejected private government, ie. monarchy. Now we need to replace private banking.

  8. F. Beard

    We have a money system, government backed fractional (fictional?) reserve banking, which systematically steals purchasing power from all money holders including the poor.

    Why look any farther than that for the root of our economic problems?

    The question is literally: “Is God mocked?” i.e. is “Thou shalt not steal” optional in the case of banking?

  9. toshiro_mifune

    What is distressing is that people on the wrong side of Wall Street’s self-serving stance, or those who at most get crumbs, also defend this anti-capitalist arrangement.

    This has been one of the most interesting aspects of the entire fiasco. Namely; the defense of the status quo by those most damaged by it.
    You mention Stockholm Syndrome, which I think is fair enough. It just keeps reminding me of what many (Malcolm X in particular) described as the mentality of the ‘House Slave’, defending the Master in hopes of getting scraps and never questioning why they are in the position they are in the first place.
    I started re-reading X’s writings and speeches in `08 (mainly because I hadn’t spent too much time with them previously). It was surprising as to how much of what he called the ‘Slave mentality’ is now applicable to the former working and middle class in America.

    1. jonboinAR

      This may be bad to say, but I’ve often thought that black culture rebels somewhat against the idea of being mere cogs in the machine because they weren’t slaves for long enough to get used to it, only 400 years or so. Whites, most of us have been slaves for 1600 years or more. Most of us have come closer to accept being peasants, house-slaves with a few priviliges. I don’t know, but I think that most asian cultures are about in our boat. Black culture seems to retain a memory of life as free aboriginals, in Eden, or something, or as my archaeological professor called it, pre-historic (he explained to us how civilization, as we call it, is mainly a racket.)

      1. John Merryman

        That ties into a point I make in physics discussions. We view time as the present moving in a linear fashion from past to future, but it’s actually the present which is the constant and the events which go future to past. We don’t travel the fourth dimension from yesterday to tomorrow. Tomorrow becomes yesterday because the earth rotates. Thus time is an effect of motion, not the basis for it. It is similar to temperature. One is the sequencing of motion and the other is the degree of motion.
        Now in a political sense, the basis of tribal, national and religious identity is a collective narrative. That we are all pointed in the same direction and moving together. That of the temporal sequencing. The reality is more of a tapestry, in that our lives are a bunch of crosshatched threads and while bands of us work together, they do so in a larger context of other groupings, so at greater levels, it’s always this tapestry of (thermal) activity.
        So, the greater degree of civilization you have incorporated into your psychic makeup, the more you are domesticated into a larger group and culture. This is primarily a problem when that grouping is starting to fray and individuals have to think about larger issues than whatever backside they were following.
        This also goes to our religious concepts as well, since monotheism is a form of moral and cultural Platoism. That of the ideal to which we are all drawn.
        The fact is that the universal state of the absolute is basis, not apex, so a spiritual absolute would be the essence from which we rise, not an ideal from which we fell. The proper metaphor for this spiritual purity would be the innocence of the child, rather than the wisdom of the adult. Age simply tempers this primary awareness. Just as we age, we go from following what came before, to leading what comes after.
        Good and bad are the biological binary code of attraction and repulsion, with morality as an evolved complex code of behavior by which groups of people relate. Similar to language.
        Which all goes to say that the philosophic issues are far more extensive than how to structure a viable economic model. Which would necessarily entail treating money as the public contract that it is and not a store of private wealth, that requires the creation of large amounts of illusionary demand to stabilize the supply.

        1. grandiosity

          @John Merryman:

          Criminal enterprises have their rising and falling, over time as you say. Some leave behind good and honorable works. Succeeding generations of thugs receive their wisdom from such good works, when eventually they realize they need it, and on we go.

          We are now in a phase of reminding our current bunch of thugs about the economics lessons that were learned (by just a few) during the 1930′s and 40′s. The political tensions of the Cold War debased economic discourse at all levels, and now we are in a Santayana moment: post-bankruptcy, reading our Keynes and Adam Smith, and trying to figure out what to do about enterprises that extract so much wealth from the flow of paper obligations that “animal spirits” of investors became depressed.

          What are these lessons? Here is my short list:

          1) Revise Ricardo’s theory concerning the distribution of the benefits of trade. Offshoring production to the cheapest supplier is not obviously the best deal when production involves huge investments in capital, both physical and intellectual. The mathematics of this is relatively straightforward — the devil is in finding all the relevant data and in building political institutions to make industrial policy.
          2) Revise macro-economic equilibrium models to include the allocation of credit. The mathematics of this is very difficult, but fortunately the data exists and the political institutions (central banks) are generally up to the job.
          3) Revive and generalize Keynes’s work on the Bancor — essentially this is a practical means of redress for enterprises that generate persistent surpluses: the surpluses disappear unless they are spent within a few years.

          1. John Merryman

            Grandiosity,

            I think a basic solution is social acceptance that money is completely a medium of economic exchange, not a store of value. For one thing, when we treat is as a store of value, the tendency to hoard it creates far more than there is production to exchange for it and the financial industry is tasked with ways of creating demand to stabilize and maintain the supply.
            This has nothing to do with socializing tangible assets. An example is that we own our cars, houses, businesses, etc, but not the roads connecting them and no one cries socialism over that. Conceptually, money is similar to roads. They are both publicly supported circulation systems.
            It was one thing when banks issued their own currency, but with the currency guaranteed by the government, as those trillions spent to bail out the banks attest, then banking should be treated as a public utility.
            Government started out as private enterprise, what we would call warlords today and eventually gentrified into monarchies.
            This doesn’t mean banks and money should be controlled by political leaders, but as a distinct function of the economy. An analogy would be that government is the central nervous system of state, while banking is its circulatory system, with money as the blood. They are both pervasive, but distinct systems.
            Democracy works because political power is pushed down to the level it is most responsive and capable. A public banking system should also be as much or more bottom up than top down. Possibly with local banks tied into state wide system, that then serve as shareholders in regional and national banks. Having such an integrated system might serve to reduce the regulatory burden, as local administration would have a greater organic knowledge of its clientele.
            With a debt based currency, the Federal government doesn’t actually budget, but effectively tries to find ways to spend money, since the process is one of putting together enormous bills, then adding whatever it takes to get enough votes. Proper budgeting it to prioritize and then spend for what can be afforded. One way would be to take these bills, break them into their “line items,” have each legislator assign a percentage value to each one, put them back together in order of preference and then have the president draw the line. One effect would be a serious reduction in federal funding of local projects, but with a local public banking system, the profits would go into these local services and projects, rather than being skimmed off by big banks.
            The fact is that life is bottom up and a strong foundation is of primary importance.

          2. attempter

            It was one thing when banks issued their own currency, but with the currency guaranteed by the government, as those trillions spent to bail out the banks attest, then banking should be treated as a public utility.

            Yes, it’s irrational and incoherent to have the government guarantee the currency but have private banks “manage” it, i.e. manipulate it for their own short-term advantage.

            It’s absurd on a practical level as well as an alienation of sovereignty.

      2. John

        The segment of blacks in America that don’t identify with whites will always buck the system that enslaved their ancestors.

        Whites think the system gives them privilege so embrace their own serfdom under their political and economic masters.

        1. jonboinAR

          I don’t know. Sometimes I think we’re just used to it or thoroughly indocrinated. I see those around me just sucking behind, justifying via Fox programming all of the taking of the corporations, total Stockholm zombies.

  10. Yearning to Learn

    Depressing.

    It has been frustrating to watch the evolution of the downturn. Especially because many of us see that there really is almost nobody in a position of power fighting on our behalf.

    the entire system is rotten to the core.

    worse, most people I am in contact with can’t see it.

    I guess that’s what happens when you have a Corporatocracy/Kleptocracy with an iron grip on media with which to disseminate constant propaganda.

    There is absolutely no accountability anywhere. Say whatever the heck you want. Doesn’t matter because nobody cares. Caught in a lie? Who cares.

    I never understood this saying until around 2005, but couldn’t agree more: “Ignorance is bliss”.

    Guess I should stop reading NakedCapitalism and start watching the Jersey Shore or something.

    1. jonboinAR

      Maybe on a more-or-less subconcious, sort of animalistic level of reasoning, most people judge that “the man” is well-organized and equipped while we who, together on these blogs, like to call “b#llsh!t”, are not. They rationally decide that until someone over here starts to get it more together organizationally, they’re better off keeping their heads low.

      People, we have to organize if we want our voices heard. It’s hard to do, I think, is why most of us don’t. We can’t afford to pay someone to do the work for us the way the rich can while they go yaughting or otherwise relax, but have to do it in our spare time after work and family responsibilities are finished. It is hard. Several of us have banded together. We plan to act collectively when we can figure out how to do so in a coherent fashion. I posted here once or twice asking for members. When I put an email address in asking for respondents, it got deleted, as spam I guess. The other one someone responded, “Hey, come back when you have a web-site”, which I guess was fair. After several weeks we haven’t gotten a web-site together yet. We keep going over policy issues.

      I would love to see all the really erudite folks here on NC, over at EconView, BS, Angry Bear, and other pointing-out-the-BS blogs get together to work out coherent policy positions we can work collectively on and bring to our communities. I don’t know how to email all of you. Our anonymity, while protecting us in other ways, limits our ability to organize.

      I think maybe that the fact that I don’t know much, don’t have a lot to contribute compared to many, hurts my credibility quite a bit. No one has a sense of who I am or why I should be paid attention to. My goal is to get the thinkers together to develop policy. I don’t see myself as having a great deal of influence in that policy, too little education or experience. I’m happy to bring them coffe, so to speak. If they would get together on THEIR own and develop something for me to join I’d be happy with that, but I haven’t seen that happening.

      Is there any way to email a bunch of y’all (Arkansas-speak), to bug you more? I don’t know what to do. I do think we need to start emailing each other as, well, 5 of us have started to do. But there’s several dozen, at least, more, currently constantly in these discussions, and we need their brains, badly.

      I do hope this isn’t spam.

      1. DumpTheBankInfoWiki

        There ARE organizations doing actions on the banks…..you have to find them. I am meeting a group to march on BOA today at 10:30.

        We do need MORE organization, because you are SO right, the rest of the people…..it’s Jersey Shore or Dancing with the Stars….to my utter disbelief.

      2. avgJohn

        I might be interested if you could define a set of goals you were interested in attaining. Maybe an 8 or ten point prioritized list of what the group plans to accomplish. Things that would appeal to a very wide swath of the public.

        I am a person that would like to see radical change in how we go about organizing ourselves into a society, but am realistic enough (I feel) to be satisfied with more moderate reform, if it would secure a better future for the American public and the world(and more particular my grandchildren).

        I would like to see a web site with a lot of user input, a lot of polls, and a lot of feedback. I would also like to see a discussion of issues on a pro/con format, with an invitation to guests writers to posts articles on both sides of an issue, each providing for comment from the guests. The pro and the con would each have their own comments section and criticisms of the other side would be limited to the users preferred comment section. In other words, people would be free to read, comment, and criticize on both the pro and con side of an issue, but only on their preferred thread. But you wouldn’t have a bunch of people continually sniping and insulting each other on the same thread.

        I for one don’t mind it, but a lot of intelligent, insightful people who might contribute otherwise might find a format full of nasty snipes and comments distasteful and not worth the effort. Let’s face it, Naked Capitalism is one of the few sites out there where people seem to be voluntarily civil for the most part. Something like the comments section of ZH, while entertaining, is never going to appeal to the general public, regardless of the fact that they provide some great insight with their articles.

        I do a little programming (self-taught) and would volunteer to help with web site development (asp.net, jquery, xml, db) for a good cause.

      3. avgJohn

        I’ve been turning this idea over in my mind a little more and the more I think about it, the more I like it.

        I think there are lot of people that would agree that an elite group of people has managed to capture our political process. Furthermore, the average citizen or even group of citizens are unlikely to be able to match the kind of financial resources necessary to wrest the power away from this elite group. But what advantage might we have? Numbers of voters we could possibly deliver, of course.

        Imagine the web site at election time. Common issues are selected and each candidate is offered an opportunity to present their position directly to the web site viewers (guaranteed activists). Or consider an invitation to a politician that has received a great deal of special interest funding. Invite him or her for a question and answer forum to justify their acceptance of such contributions (who and how much). For a candidate that is being seriously outspent, they may want to risk an open format, fielding questions from the public to garner support if they lack the funds to match their opponent’s media campaign. Hard ball question straight from the public, questions designed to put their feet to the fire.

        Straight up questions, like “how do you feel about Wall Street bonuses in a failing economy with unemployment at 22% and what do you propose we do about it and why”? It’s time we make our elected officials answer directly to us.

        We could offer promising candidates an opportunity to expand their campaign staff by offering door to door canvassing and economic blogs and news media comment blitzes promoting their candidacy. Just be very vigilant that slick politicians don’t try to co-opt the site, by always providing everything on a pro/con basis, and promote acceptance of the fact that it’s acceptable to disagree. Remember we would attempt to attract site links from economic and political blogs on the left and right as well as the main stream media. All of them encouraging their readership to our site for polling and comment. What is the will of the people, who can deliver the most support for a position? Let’s poll it!

        1. jonboinAR

          @avgJohn: Thanks for expressing your interest. I really like your idea for a website around which a democratic political force can form and where politicians requesting support would have to answer direct policy questions. I don’t think we’ve quite thought of that, but I like it. We haven’t gotten past trying to develop a direction as a political committee with not any members to speak of, as yet. We’ve only been at this in some of our spare time, though, for really a few days.

          Our inspiration comes from what we see in that this site and several parallel ones that among people who care to follow somewhat closely the events since ’07, SOME consensus has seemed to form on a few topics such as that the banking industry has gotten away with murder, and that corporate influence has gotten nearly complete control of the Americal political system through heavy lobbying and large-scale political bribery, accomplished via a patient strategy that has made at least much of what they do legal. When we call them crooks, probably more often than not the term has figurative meaning.

          I want to talk to you or to have you join our discussion. I don’t know what the best way to do that is with proper etiquette. The last time I posted an email address my post was quickly removed. I don’t know what’s considered proper here. Can someone help me?

  11. rd

    I agree with Mr. Eckhaus’s statement that “Those who are responsible for profits should share in the profits in a way that rewards them.”

    According to the National Debt Clock, I believe that we are up to about $14 trillion in debt with a per household value of about $45k. I have seen various accounts of the value of the bailout (including ZIRP) over the past 3 years, but let’s say about 10% of the total national debt to have a nice conservative round percentage (real value is probably much higher).

    I prefer to view the bailout as an investment. Under capitalism, investors should be rewarded when there are profits. Essentially we are angel investors as the financial firms would have gone bankrupt without our participation.

    So, I would like to start seeing dividends on my investment since they are reporting significant profits. I think 10% annual dividend rate on my household’s $4,500 share of their bailout would be a reasonable return on equity. I would appreciate it if whichever bank (Goldman Sachs, JPM, whatever) is responsible for my payment can send me my $450 annual check when they pay their bonuses to their staff.

    BTW, I am an engineer (one of the unproductive class that exist to provide cash flow for the essential bankers). You know those poorly managed media events, such as bridge collapses, levee failures, space shuttles exploding etc.? They really have nothing to do with us engineers- they are purely bad luck because of Mother Nature’s problems with variables like gravity. So please increase our design fees, but don’t bother calling us if your family drives off of a collapsed bridge.

    1. PQS

      You describe the exact logical flaw (as did Yves) in this “argument” about sky high pay.

      In my world, commercial construction, there is ALWAYS someone to blame when there are failures. ALWAYS. (And lots of lawyers to lay out the case). It is usually the General Contractor, the Design Team, or the material stream. Rarely (and I mean like once in my 15 year career have I heard of it), there is an unusual “confluence” of conditions that causes some kind of failure. (I’m thinking of a project where the type of solder used on the plumbing pipes reacted with extremely hard water in a desert climate, causing massive, unanticipated failure in all the plumbing joints. In a hotel.)

      So, I just don’t buy it. I don’t buy that these people are “worth” this much money, and they can tell me that all day long, but it still isn’t true. Nobody out here in the real world is “worth” that much money, not over a lifetime, and certainly not in a single year.

      What do these people actually contribute to anyone OUTSIDE their little circle? How many people has Blankfein hired to do something for his lavish lifestyle other than people in his firm? How many companies have these people created that have created jobs for people beyond the FIRE sector?

      I like your idea of a dividend. Maybe in 35 years I’ll make back the money I lost in my 401K due to WS shenanigans. Or the six months’ of pay I lost while unemployed, due to bankster fraud.

      1. Wendy

        The most offensive aspect of all is that they justify it to themselves and the world, boastfully, claiming, “I am smarter than you. I am smarter than 99% of people. I work harder. I DESERVE more.” They *believe* they deserve it. It’s sick, and sickening. What they deserve is a f***king BILL, their paychecks docked to nothing, for all the havoc they have wreaked.
        What can we do? I personally am determined to avoid enriching their coffers ever again, through my bank deposits, through a mortgage, through mutual funds, whatever. But acting alone, I can’t do much. I agree, we need to organize. I hope this desire will evolve both on this blog and through the commenters here.

      2. DumpTheBankInfoWiki

        I am also in the construction industry.

        “Maybe in 35 years I’ll make back the money I lost in my 401K due to WS shenanigans. Or the six months’ of pay I lost while unemployed, due to bankster fraud.”

        I had to take a job at ’90s level of pay JUST TO GET A JOB! I don’t think I will be able to make this back EVER. I hold contempt for those on Wall Street.

        1. PQS

          Moi aussi, my friend. Me too.

          When I did finally find a job, it was at a $20K a year cut, plus wayy more in costs for health insurance. But I’m not complaining, since I know plenty of people who haven’t found ANYTHING in 2 years.

    2. Obsvr-1

      yeah right,

      the money that has been stolen from the corrupt system came from selling bonds to you (pension funds, SS trust fund, 401K)

      and now the same thieves are looking for ways to capture those assets as well (e.g. Ireland pension funds).

      At some point the masses will have to wake up and demand change.

      End the FED, End TBTF doctrine and implement a sound money system would be a good start. Support the Ron Pauls of the world to get the ball rolling.

    3. otchmoson

      rd–

      Wouldn’t that calculation be 10% of a $45,000/family “contribution? So a “fair share” per family–for a ‘fair’ ROI would yield a family $4,500/year–not $450. If the big banks had to pay those ROI’s BEFORE paying executives, perhaps the ‘profits’ on which executive compensation is based would not be quite so astronomical.

  12. Richfam

    Under what circumstances is it ethical to profit from investing? If you take your own money and invest it well, is that okay? Define invest it well – are mutual funds “approved”? If not, is the entire asset management and hedge fund business corrupt and worthless? Or, is it this just about banks/brokerage firms taking money from clients and paying themselves? Whats the difference between a bank making a mortgage loan and retaining it as an investment and buying a high yield bond as an investment? Define a “boring/utility-like” bank. Does that bank take deposits and make loans? If they make loans aren’t they taking risk on the borrowers at the expense of the taxpayer? If the bank does not take deposits but instead raises equity investments from its owners and then borrows moey to make loans is that okay?

    I could keep going, but I’m just trying to understand what finance looks like under Treasury head/ SEC chair/ chair of the banking committee/ grand poobah of all finance in the world and blogger pointing at the capitalist without clothes…

    1. Yves Smith Post author

      Pure straw man. The people we are discussing are agents, not principals.

      We are talking about unregulated pay for an industry that has such massive government subsidies as to be effectively NOT private. So why are they entitled to control their own pay levels?

      1. Matt

        Non profit, pension, and government entities should be forbidden from buying, or selling, derivatives of any kind including interest rate swaps, securities borrowing, credit default swaps, synthetic CDOs etc,etc,etc.
        I challenge anyone to show where there has been a long term gain in any one of these areas for any investor short of the investment banks and some of the hedge funds.
        Rather than facilitate the allocation of capital these new products have only been used to pillage society. That the US plunderers are taking down 160 Billion a year for the privilege is adding an odorous insult to the fatal injury.

        1. Richfam

          To far but I get your point. Interest rate swaps for example are relatively simple and an effective way to control interest rate risk which can be important to some of the entities you mentioned. Its also not a big money maker for wall street. Counterparty risk and exchanges for this stuff is a fair question though. But certain kinds of swaps are not evil and did not send the world to hell and clearly help with risk management. Another example, this CDS. If a company does business with another company creating accounts recievable that company may want to hedge some of that recievable risk.

          So there’s some real fair hedging – but all financial markets have hedgers and speculators – and there’s a place for both.

          I can go on but I’m just saying its not all bad – but plenty was.

          I’d totally agree that a financial product created to fail – such as many of the CDO’s discussed by the sponsor – are fraud and its amazing that no one is in jail for it. What made Paulson’s short a big money trade was shorting those securities and their derrivatives. What made it insanely big was working with a banker to create a structure INTENDED to fail. This defines fraud in my opinion and its amazing that there’s any question about it. Imagine Ford selling you a car whose breaks were meant to fail.

      2. Richfam

        Yes, agreed on both.

        Totally not the topic, but it within the context of the total blog perview and some of the questions are very related to the topic. I’m just saying its not always about other people’s money. A good asset manager/fund manager has a responsiblity to clents and should, where appropriate invest with the client. (we insist on a long term lock up of fees for any fund with a performace fee , the manager’s money is fully at risk with the client at all times.) But you’re right we are talking about the agents.

        Totally agree, bail them out, the gov owns them, control the pay. Forever though? Also, some of my questions are related to the topic. First, don’t bail them out…so then we get into tbtf and counterparty-risk etc… Yikes… Also, deposit insurance is the real problem to me. A government insured loan gives the banks an awesome advantage. So protect the depositor and forget the rest instead of bailing them out.

        If there is deposit insurance then banks should not be in the brokerage business. Its too volatile and greedy. People who work on wall street (and I’m not talking about the “banking” business) do it for money. Forget the moral judgement of that – focus on the economics. Big depositor balance sheet, big greed, big ka-boom.

        I dont remember the world coming to an end when Kidder and Drexel died. And thats the thing, brokerages are an unstable business – they go down all the time – so they should not be part of the bank. That way theres no need to regulate brokerage pay (finally getting to the point). Brokerages and fraud are another topic…

        Example – I don’t hear anyone complaining about how much people make at Lazard (or Sandler to use a smaller example)- and they make plenty and they don’t need pay regulation in my opinion (niether did Drexel).

        Greedy people with balance sheet…so bad. But you see? Poor regulation creates the need for regulation of pay. You can’t stop people from working for what they want – in this case alot of money – its like trying to squeeze water in your hand – just keep them away from the depositors money.

        btw, thanks for posting me. I promise to be nice.

  13. jjm98

    Yves, it is a shame that there is no longer any discourse on your website. I think you make good points almost always. But please be aware that, judging by the constant “rah, rah- you go, girl” comments on your blog (especially over the past 2 years), it is easy to fall victim to pandering. Take the comment by jojo- what does “overcharging” mean? These are obviously market rates. Yves would probably argue that the market is rigged with govt help but your readers are simply not as educated or experienced as you. Please keep that in mind.

    1. craazyman

      Can you make a case that these salary levels are somehow appropriate rewards for some sort of socially useful activity? Or can you at least make a case that, odious as they are, trying to reign them in will only produce a worse outcome? What’s your point?

      Otherwise, your comment is not very enlightening.

      Be the discourse you seek.

      1. Dan Duncan

        Can you make the argument that a few “select” people shall be the arbiters of what is and what is not a “socially useful” activity?

        Assuming you can’t—and you can’t—then you’re arriving at the crux of the problem: How is “socially useful” to be established? By whom and how often?

        Look at it from a different angle:

        Later in this thread you make a defense of Attempter…who seems to represent the Leftist view of this community quite well. [Specifically the view is that free-markets are evil.]

        You made this defense of him by stating that “Attempter has a point of view that he argues in a “forceful and articulate way.”

        But take the time to read again what he wrote…as it deals on point with the determination of social utility:

        Attempter writes this disturbing missive [emphasis is mine]:

        “As for absolutely worthless criminals and parasites like Eckhaus and EVERYONE ELSE in the finance sector, THEY SHOULD SIMPLY CEASE TO EXIST. THEY’RE NOT ENTITLED TO LITERALLY ONE CRUMB OF FOOD OR ONE BTU OF HEAT OR ONE SQUARE FOOT OF SHELTER, AND SHOULD RECEIVE NONE. On the contrary, they’d have to perform the hardest labor for thousands of years to restitute all they’ve stolen.”

        By making “his point” in such a forceful (though not particularly articulate manner), he answers your 2nd question— which was: “Or can you at least make a case that, odious as they are, trying to reign them in will only produce a worse outcome?”

        Attempter already made the case for you…only you didn’t notice it.

        1. attempter

          I don’t have to argue that “free markets” are evil because free markets are a fairy tale, like leprechauns and unicorns.

          Markets rigged by vicious, worthless criminals, on the other hand…

          And how nice to see you proclaim that the tyranny of these parasite vandals is the Best of All Worlds, such that overthrowing their tyranny would bring a “worse result”.

        2. craazyman

          Dan, I actually can, but will have to lamely excuse myself today on that one due to other priorities.

          But I do appreciate your point of view. It’s not real fun for me when everyone agrees. It’s more entertaining and informative when there is a lively and intelligent debate.

          I don’t read every comment or thread, but I always value your well-articulated challenges and objections.

    2. 1whoknu

      The market is rigged by more than just the government. Didn’t you read the words? The market becomes rigged through the accumulation of wealth, which in turn allows the wealthy to rig the market in order to accumulate more wealth. Now when a price is set by those who own the market, who do you think set the price? The market?

      1. jjm98

        Agree- that is a pretty cogent argument. What we should do as a country to encourage economic (and inevitably social) mobility is a better question to be asking. Right now, it is not only very difficult to climb the American Dream ladder but it also quite difficult to slide down the chute (unless you are a professional athlete- they seem pretty good at it).

    3. Mememememe

      jim98, I completely agree. I am in the industry and generally agree with Yves on government-aided opligopolistic practices and compensation by big Wall Steet firms. The site, however, has been taken over by posters like attempter (above) who claim that workers deserve 100% of the profits. I wonder if they realize that it means that their investments in 401k plans and other vehicles deserve to take all of the losses, but not participate in any gains since they aren’t workers, but merely capital. I am coming here less and less, which is sad since I generally agree with and like Yves’ writing.

      1. craazyman

        “taken over” is ridiculous.

        attempter has a certain point of view that he argues in a forceful and articulate way.

        why don’t you offer a counter point of view with equal force and articulation.

        can you?

        or would you rather just run away and throw your hands up in the air? :)

        1. jjm98

          The point is (and I’ll try not to contribute to the whining) you and the rest of the angry mob all agree- and that can’t be good. I come here to learn- and often do- but lately I read more comments like your that are more “maadman” than “craazyman”. Yves has a special talent for thoughtfulness and has been level-headed. In the Facebook world, everyone can justify his opinions, no matter how far-fetched. I hope NakedCapitalism will continue to be a place I can go for level headed views. that’s all

          1. craazyman

            sorry jjm98. I didn’t mean to be snarky although I can see that I might have been.

            I appreciate your point of view.

            Sometimes I express myself through fiction and metaphor, but hopefully always more or less on topic. And hopefully more rather than less. Sometimes I think that’s a bit more entertaining and illuminating of the underlying energies of a set of relationships.

            Language is quite flexible. I’m not a madman at all, in reality. I’m no Stephen King — don’t have that kind of talent — but if he writes a horrific or slightly unbalanced character, it doesn’t mean that HE is the character.

            But it may be that the character embodies a certain human truth, or at least illustrates one.

            I think the horror show these days is all on the banksters side, but I appreciate commentary that tries to rationalize it, as long as it’s sincere. I think there’s a good case for a healthy finance business, but run a different way than the methods in operation today.

        2. jjm98

          BUT NOW THAT YOU MENTION IT, where in the Constitution is it in written that a man’s work has to be socially beneficial? If that were the case, social workers would make more. If these bailouts never occurred (hence my comment about govt rigging the game), then it is really none of business what these people are paid, unless you are a shareholder, who seem to be fairly unperturbed.

          1. Elliot X

            @jjm98

            Michael H linked to one blog but there are literally dozens, if not hundreds of libertarian, Ayn Rand worshipping blogs, where expressing the least concern for the poor, or simply trying to have a discussion about wealth inequality is enough to get you labeled a communist.

            Have you looked into any of those?

          2. jjm98

            This is my point, Elliot. This site’s discourse was NOT supposed about you trying to get rid of me b/c I disagree with you. Never did I say I did not care about the poor. This site has Capitalism in its title and Yves, no doubt, believes in Capitalism in some form. I do not think you, or Craazyman or Attempter are Communists or bad people. But loud as you are, you not Yves only readers.

            Yves, people want me to leave b/c I question the idea that Wall St has to be social “useful”. That is what I wish you to be careful of.

          3. Elliot X

            jjm98 said: “This is my point, Elliot. This site’s discourse was NOT supposed about you trying to get rid of me b/c I disagree with you.”

            Um, no one is suggesting you leave. I visit more than one blog, and you’re free to do the same. I was merely pointing out that you can find many blogs where no one would dare express a point of view that is even remotely left-leaning, to say nothing of left wing. You would be dismissed as a communist, end of discussion.

            In fact, the vast majority of blogs are like that, in my experience. (There was a discussion on NC a few weeks ago about the absence of left-wing blogs, so apparently I’m not the only one who has experienced this.)

          4. LeeAnne

            Bankers are using other people’s m money. Even casinos let you make the decision on how YOU are going to gamble with YOUR money.

          5. attempter

            where in the Constitution is it in written that a man’s work has to be socially beneficial?

            Nowhere. He’s welcome to forage for himself, if he doesn’t choose to contribute to the social work or be part of society at all.

            But he certainly has no right to steal from those who do work. The Constitution calls that a “taking”.

            As for the comment about my supposedly radical notion that the people who do the work should dispose of the fruits of that work, let me assure you that’s as moderate and reasonable and self-evidently moral an idea as you’ll ever hear.

            It’s only those who have been totally corrupted by a psychopathic “culture” who find it odd. But it’s this culture and its ideas which are in fact radical and extreme to the point of psychotic anti-humanism.

            And for anyone who’s been saying for all these years, first they came for the unions, and then they came for the manufacturing jobs, and then for the small shops, and then for all the other small businesses, and then for the union pensions, and now for the state pensions, and now for the jobs of professionals, and now for Social Security and Medicare, but I never cared and still don’t care because I have my 401(k), let’s guess for whom they’ll be coming soon…..

          6. jjm98

            thanks, Elliot. I think there may have been a tangent somewhere I didn’t mean to take.
            This site (Yves included) has become quite critical of capitalism in its traditional sense despite, I think, its original mission.
            I do agree with what I think you mean- it’s easy for ideas to foster support on blogs which don’t stand up to logical questioning (right or left but usually right).
            All in all, I suppose I come to NC b/c it challenges some of my knee-jerk thoughts (usually right-leaning) on issues.
            Yves is great but I find it hard to understand why things were so different when she worked for big banks. The TBTF thing existed since the 1980s even if it wasn’t exercised.

          7. Yves Smith Post author

            There was a BIG difference in the 1980s. Many of the investment banks were partnerships. They were cautious about risk taking and other forms of liability, like ripping off customers too much (you’d hurt your reputation and might get sued). And the SEC was feared then too, people shook in their boots when Stanley Sporkin took an interest.

            Reagan started neutering regulators and the firms went public. And in the early 1990s, we saw the rise of OTC derivatives, which are a perfect vehicle for ripping off clients. Read Fiasco or the demise of Bankers Trust to get a flavor.

            The old farts of the 1980s, guys like Whitehead and others who were pretty senior back then, are appalled at what has become of what was the investment banking industry. You could make good but not egregious money, yeah you took clients now and again, but they net came out ahead too, it was understood that the game had to be win-win over time. The industry has now become purely extractive.

          8. rd

            I had two very big disappointments in the past three years:

            1. The TBTF companies should have been truly nationalized with 90%+ losses on the share values of the firms with the government effectively taking possession of the companies, canning management, and restructuring them to get them out of the risky stupid unsustainable parts of their businesses.

            2. Since that was not done, for the industry to understand that they had gone off the cliff like lemmings without parachutes and had been miraculously saved. This would then have been accompanied by a desire to reform and restructure their business practices. Instead, they have simply had their own sense of self-importance inflated so that they actually believe that they are untouchable.

            I find it hard to believe that the stock market is back to Shiller 10-yr real PE values of 25 and sky-high Tobin Q values. I fear that we will see another crash fairly quickly after The Bernank starts to increase short-term interest rates.

            This crash may be particularly devestating because much of the wad has been shot and the ammunition chest is running very low. The good thing that will come out of it at that time is that it is likely that the TBTF firms will end up being natinonalized as their credibility will have completely ceased to exist by that point.

      2. 1whoknu

        The Rentier System ~

        Michael Hudson

        “A century ago when the classical economists, Adam Smith, John Stuart Mill, in the reform era, tried to say: look, there are some incomes that are not earned. Rent is not earned, it’s an excess price. Interest is not earned, it’s a monopoly price. Monopoly profits aren’t earned, they’re extortionate.”

        Keynes

        “the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce.”

        http://janelanaweb.com/novidades/the-medicine-suggested-by-keynes-euthanasia-of-the-%E2%80%98rentier%E2%80%99-system/

        A man born without property or capital only has his labor. Capital and Land is passed down through inheritance and accumulated to a select few through no labor, only luck.

        Something to think about…

    4. Yves Smith Post author

      I have to differ with you on this one. Go look at the post on Peterson yesterday, we had a food fight in comments.

      The reason there is so much unanimity on this particular topic, Wall Street pay, is that I’d hazard that it reflects where the US is. Look at the virtual unanimity of the population against the TARP. Calls and e-mails to Congress critters were running 99% against it until the financial services industry started organizing employees to weigh in.

      Now I do have financial services industry readers. Many people on the buy side are also mucho unhappy about sell side pay, since it reflects TBTF subsidies, as well as using their information advantages against their clients (this isn’t universal, I must note, a good salesman is often more loyal to his customers than his employer, since they are his real meal tickets, but ex good salesmen watching out for their accounts, this generalization applies. And it’s hard for accounts to tell whether their salesman is really on their side or feigning it, the bedside manner in both cases is often identical). They might quietly agree but not participate in the thread, since to a fair degree, their pay level is probably higher than it would be otherwise thanks to how much sell side pay has gone up.

      You might expect some sell side types to weigh in and say “you are full of shit” and try to defend themselves. But so far none have. That may reflect the fact that either they can’t muster a convincing argument (the usual one is a variant of Eckhaus, “I deserve it” which holds up only in certain businesses for certain individuals, and even then, not in proportion to recent pay levels) or know they’ve won this battle and therefore don’t need to waste their breath trying to convince those not on the TBTF meal ticket.

    5. Jojo

      jjm98 said “Take the comment by jojo- what does “overcharging” mean? These are obviously market rates.”
      ———
      Overcharging means charging more for a product/service than the cost to produce/procure + deliver + make a reasonable profit on it is.

      As to “market rates”, well remember back in the day when [the old] AT&T had a monopoly on telephone service? They charged market rates also (essentially what the market would bear). The fact that they had the power to do that as a monopoly, does not make it right.

      When Wall Street “order takers” (most are not real salespeople) make hundreds of thousands (or even millions of dollars), they are able to do so because the companies offering the product/service have a lock on the market and can therefore charge prices that are higher than they would be otherwise were there competition, thus making wads of profit. That is overcharging and that is what enables the firms to pay such high $$ to lowly order takers, administrators and back office operations for essentially menial work.

      Why don’t customers complain about overpaying? Because they just pass the costs down to whomever they are buying for. [shrug]

  14. Thingumbobesquire

    What Ben Bernanke is actually thinking:

    “The Federal Reserve, in conjunction with the European Central Bank and the major nations of the West, is engaged in the most extraordinary bailout in history. Through a series of measures, both overt and covert, we are subsidizing the financial system and backstopping the major securities and derivatives markets with what amounts to a blank check. These operations are continuing, even expanding, even as we claim that the bailout is being wound down, and that the bailout is turning a profit. Without these extraordinary, taxpayer-funded, efforts, there would be no financial system.

    “The Federal Reserve and other regulators are doing everything we can to help the banks dress up their books, to hide the extent of their losses. These efforts have been remarkably successful at allowing these totally bankrupt institutions to keep their doors open, and pretend to be profitable. In doing so, we have successfully avoided runs by depositors, investors, and counterparties which could have destroyed these banks virtually overnight, and taken the financial system with them.

    “The Federal Government has, for all intents and purposes, become the residential real estate mortgage market, issuing or guaranteeing some 95% of new mortgages, and providing Federal guarantees for huge amounts of mortgage-backed securities and other mortgage-related derivatives. The maintenance of the illusion that these securities have value is a matter of the highest national security, as it is preventing the total collapse of the banking system.

    “To get through this crisis, the Fed is systematically destroying the value of the dollar. This will allow is to pay back our future obligations with cheaper dollars, a time-tested technique. At the same time, we must continue to sell huge amounts of dollar-denominated Treasuries to fund our deficit and raise money for the bailout. Therefore, we must publicly insist that we are committed to a strong dollar–even though our actions show that insistence is a lie.

    “The fact is that we are piling up new debt at a staggering rate, while the capability to service that debt is collapsing. We understand that this is unsustainable, but we view it as a short-term measure needed to help us get through the transition to a new financial system. We have no illusions that the old system can be saved, even though we constantly talk about how sound it is, and how it is recovering. We are lying, to keep the peasants calm while we set up our new global dictatorship.

    “If we told you the truth about what was coming, you would panic. We do not have the resources to keep the vast majority of the world’s population alive, and save the financial system. We are therefore forced to choose between the monetary system and the people. The choice is hard, but obvious: we must protect the money, since it is money that makes the world go around. Without capital, we can not have finance, we can not have trade, there would be no credit for the economy. In the post-bubble world, under the new global system, the carrying capacity will be much smaller. That may be unpleasant, but we ignore Malthus at our peril. For now, we require austerity and depopulation, as we return to a sustainable balance.

    “At the same time, we will require a dramatic contraction in the size of the global financial system. The first to go will be the institutions most closely associated with the peasant–what some call the “real”–economy. That means the commercial banks which depend upon making loans to ordinary people and businesses, which will be the first to feel the effects of the economic contraction. When a bank’s customer base goes broke, the bank is never far behind. We’ve closed some 300 banks over the past couple of years, and eliminated many others through mergers, but there are still thousands to go. Meanwhile, the biggest banks–ones with big securities operations in addition to their commercial banking activities–are increasing their dominance over the economy. This is all according to plan. At some point soon we will have to deal with these big banks, but for now we continue to insist they are healthy.

    “We are lying to you, for your own good. This is a period of great social engineering, and the herds are much easier to control when they are calm. Our plan requires moving the people to the slaughterhouse in an orderly fashion, and we can not–and will not–tolerate any stampedes. We would rather do this in a civil manner, but will take whatever steps are necessary to ensure our success.

    “The nation-state is an outmoded concept. In our modern, inter-connected world with its global marketplace, there is no room for such artificial divisions. If the markets are global, then governance must also be global. One world, one set of rules. The markets, and the corporations which operate within them, are far more efficient at managing scarce resources and economic activity. If the world is to get through this crisis, we must abandon outmoded concepts like nation-states and move into a truly globalized world. The Fed is doing its part to make this transition, even as we pretend the steps we are taking are for the benefit of the United States.”

  15. killben

    “Unfortunately, it will probably take another financial crisis to shake these Stockholm Syndrome victims out of their acquiescence.”

    When are we going to get this … 2012 or 2013?

  16. Hugh

    Eckhaus is just a conman selling his con. It is futile to look for any reason or argument in what he has to say. It is just patter to keep you occupied while he and his rob you blind. What we need to keep focused on is that he is a criminal in a criminal enterprise, and that is all.

  17. ep3

    at a small business CPA, I see some of the same attitudes as these guys from the heads of small businesses (especially restaurants). The utmost important thing is seeing that a large profit is created that is then flowed thru to the owner. Then, there is also an belief that they don’t know how business will be tomorrow so they must save as much money as they can to absorb any future shocks. That is not entirely wrong; some of that flows from Michigan’s business climate. But many employees are suffering because of this.
    Like you say Yves, that old adage that the boss is the last to get paid has been thrown out the door. It’s now about the boss getting paid whatever he likes regardless if it bankrupts the company. I blame a lot of that on the tax structure. It’s more beneficial to flow profits thru to personal returns than to leave them in retained earnings. And not because the corporate tax rate is so high. It’s because the personal rate is so low.

  18. Obsvr-1

    It is sad when corruption reaches the height of leadership, that is when we are all screwed as the criminals take over the institution. We are now operating a full on corporatocracy. We need an intervention of the masses to return the moral compass to an ethical base and restoration of a competitive free market so the people can vote with their money and their feet to put self correcting forces of a competitive market system into play. Returning to Constitutional sound government would be a good start.

    It is outright appalling to see our leadership in gov’t fall into the cesspools of corruption.

  19. Expat

    re: Andy Hall, it was my understanding that Occidental bought Phibro at such a low multiple because they covered Andy’s bonuses along with the other bonuses at Phibro. Many of the traders from Phibro have moved on, but for the past years it has been purely Andy Hall’s private hedge fund…he ran 90% of the VAR there.

  20. scraping_by

    Meanwhile, tomorrow a bunch of large multimillionaires are going to smash into each other for the entertainment of anyone who likes that sort of thing. Which includes me, most of the guys I know, and a lot more women than let on. Anyway, it’s the job title with nearly the same income range as Wall Street traders. Let’s explore.

    Many a barstool orator likes to go on at length on how overpaid professional athletes are. Usually, this is mentioning a salary, then howling. Then snarling about some less than perfect performance. Ending up with the canard that raising players’ pay makes ticket prices rise. That last almost makes me despair. I’ve many times explained the owners are going to charge the going rate, and not a nickle less, which means the money’s there and somebody’s going to get it.

    People who object to one financial functionary being paid equal to 100 nurses tend to talk about sustainability, justice, and end up wearing the title of ‘progressive’. They could also be speaking from viewpoints of reengineering, supply and demand, or GK Chesterton’s idea of ‘Distributionism.’ These days, the progressive title is usually bestowed on the folks CS Lewis called ‘The Clevers’ in Pilgrim’s Regress. Those of us who look for a little social utility in economic activity are union thugs or ignorant outsiders.

    When William Safire wrote that baseball players deserved to get what they’re paid, because they were the ones who created the value, I was shocked into thinking he meant that as a general rule. Turns out he’s still on his side of the class war, he just wants to recruit new blood. But the statement itself is correct. Many traders have been replaced by a few lines of computer code and their employers are making out better for it. The best game on Madden lacks the slice of life reality of a sporting event. You need warm bodies.

    Whatever the entertainment value of pugalistic sport. the entertainment is a verifiable good. The majority of financial transactions are insider redistributions which do no good. It’s overanalysis to call this two groups of workers being pitted against each other by the capitalist bosses. It’s the difference in a game that’s being played seriously vs something serious being played as a game.

    http://en.wikipedia.org/wiki/Distributism

  21. Schofield

    It’s time Greed Street was subject to a shake-down. It massively distorts the American economy with its pump-n’-dump bubble blowing.

  22. fromchina

    “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”

    The two are not mutually exclusive :)

  23. David

    To some degree, I think the Wall Street firms pay the big bucks because they don’t want their people to think about ethics. As Michael Lewis said in his book, “who is paying you, Salamon Brothers or that German guy?” The firms want those individuals who think nothing of overcharging pension funds or committing other crims (overlooking Ponzi scehmes) to make big bucks. That’s why they pay the big bucks. So the employees can’t afford to start thinking about the right thing to do. Just get a Triple A rating on the subprime crap. Because, whose paying you, the people who will get stuck with that crap or _____________ (Goldman Sachs, Lehman Brothers, Merill Lynch).

    Having these types of people at many key positions at the firms is what almost destroyed them. It turns out these people decided that they could cheat their stockholders and borrowers just as easily as they cheated the people who got stuck with the subprime crap.

    The really bad thing is that nobody has imposed stricter capital requirements on the firms. If they forced the firms to achieve no greater than a 10 to 1 debt to equity ratio, the firms couldn’t spend the money on these bonuses.

  24. Onray

    For us to quibble about how much Wall Street financiers receive in compensation is the same as questioning how well decorated our masters’ bedchambers are.

    The massive accumulation of debt as individuals and as a country means we are slaves to the wealthy and to other nations.

    But it goes beyond that.

    Our entire social, political and economic system is based on lies. We live in an empire built on the British Empire, derived from the Roman Empire and before that from the Greeks.

    Plato’s Republic was based on the Noble Lie. In this ideal there are three classes of individual: Gold, Silver and Bronze. This is a falsehood. We are all human beings, and though we do not have the same capabilities in all the same dimension, we are all intelligent in more or less the same degree.

    How can a system built on falsehood possess any validity? It can’t.

    If the system has no validity, it must be changed.

    You might say to me the only thing that motivates people is money, money begets power and so things will never change.

    This argument comes down to “I’ve got mine, you get yours.” Might makes right. These are not values for adult human beings. These are the values of a four-year-old child. The wealth that is produced in this world is the collective effort of all people. How can it be otherwise? If you claim some benefit beyond what you have actually created with your own hands this can only be done by trickery.

    Political and economic systems are based on consensus. We have to agree to live under the rules. When the rules are no longer fair, all bets are off. When people have little to lose, look out.

    That is what is happening in the world today.

    I no longer agree. Many people agree with me.

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