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Citi Cuts 11,000 Jobs Rather Than Lower Pay, Illustrating Rentier Capitalism in Operation

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Citi is a particularly blatant example of a way of operating that has become endemic in American business: when things get tough, throw as many employees as possible under the bus, and use that to maintain or even increase the pay of the top echelon. In investment banking, the number of folks who are spared from corporate austerity is larger than in other businesses, since those businesses have more profit centers (a single trader can have his own P&L) but the same general principle applies.

William Cohan of Bloomberg highlights this phenenomon:

This is the reverse of how business used to operate. When I was a kid on Wall Street, the line at Goldman was that partners lived poor and died rich. Even though everyone’s pay would suffer if the firm had a bad year (that was the poing of bonuses, you knew your pay depended on firm performance), the partners took more of the variability in pay themselves and did everything necessary to preserve employment levels. The first time Goldman had actual layoffs, as in fired people because the firm was having a bad year (as opposed to for individual performance reasons) was in the early 1990s, and it was highly traumatic. And this attitude was not unusual in Corporate America. A CEO would reduce his pay if his firm was suffering; broad headcount cuts were seen as a sign that a business was in very serious trouble, and the market often did not react well to them.

Now Citi may have some fat in selected areas, and it is a famously badly run firm. But given how aggressive banks have been in wringing efficiencies out of their operations, and how much pressure Citi has been under to rationalize its businesses, these cuts look to be reactive, to reassure the Investor Gods that Action is Being Taken.

On a broader basis, Henry Blodget wrote today how destructive the “cream for the top, crumbs for everyone else” business attitude is:

The first chart shows that big American companies now have the highest profit margins in history.

The second chart shows that the companies are now paying the lowest wages in history as a percent of the economy.

If you happen to be an owner of a big American corporation, these charts could be construed as good news: You’re coining it!

If you happen to be a rank-and-file employee, however–or someone hoping to be such an employee–this is bad news: You’re sharing less than ever before in the success of American industry.

This situation, by the way, is only temporarily good news for the company owners. Because, by pumping so little back into the economy in the form of employee wages (and capital investments–the other area where companies are scrimping), our companies are constraining the growth of the economy.

Why?

Because the rank-and-file employees of America’s corporations are also mainstream American consumers–the folks who account for ~70% of the spending in the economy.

Almost every dollar these folks earn in salaries gets spent–on food, clothing, houses, education, entertainment, cars, and other goods and services that big American companies produce.

So, if, instead of hoarding their wealth by hiking their profit margins ever higher, companies invested more in employees and equipment, they would help the whole economy.

And the companies would also, of course, help their employees–the people who are dedicating their lives to helping the companies earn such vast profits…

The business-ethos pendulum in this country has now swung so far toward “profit maximization” that most American companies would never dream of voluntarily sharing more wealth with their employees.

These employees, after all, are not viewed as people. They’re viewed as “costs”–cash outflows that just drain financial value away from owners…

Think about that for a minute.

Some of the richest, most revered companies in this country–companies that are currently generating record-high profits–pay their full-time employees so little that they’re poor.

Even more depressing is the fact that concepts like “fairness” and “sharing” are now seen as evidence of bleeding-heart socialism–as though the only way to be a bona fide capitalist is to treat your employees like costs and pay them as little as possible.

But Citi and its ilk are perpetuating this race to the bottom. We’ve had a radical shift in business and cultural values in a mere 30 years. Neofeudalism seems to serve the elites just fine, and many of those who are not on at top of the food chain seem reluctant to believe that the system has been restructured to exploit them.

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74 comments

  1. PQS

    “Neofeudalism seems to serve the elites just fine, and many of those who are not on the top of the food chain seem reluctant to believe that the system has been restructured to exploit them.”

    Not only that, but those AT the top refuse to believe that they have been given very generous benefits and special handouts their entire lives. See: Mitt Romney “Just borrow money from your parents to go to college” or “I came up through small business”. Yeah, small business that requires the ability to walk into a bank and borrow $50M for your “startup.”

    These people honestly believe they are “just like” the corner grocery store small businessman or gas station owner, no matter what reality may indicate. Likewise, the income inequality is so pronounced that most Americans cannot even fathom the 1%’s riches. They think “rich people” ARE the local grocer or car dealer.

    1. Jerry Denim

      “They think “rich people” ARE the local grocer or car dealer.”

      Yup, and further more they dream of maybe being that guy one day, hence the reason so many people in extremely poor red states are against ‘tax hikes on the wealthy’.

      Since most folks in Mississippi have never met an elite fund manager or trader their money and lifestyles are beyond comprehension.

      1. Mannwich

        Well, of course, the financial services industry as a whole is too large, but that’s whole other topic.

      2. PQS

        If Citi is making record profits, along with the rest of the financial and corporate world, why do they need to cut so many jobs?

        It seems to me that if a company is faltering in the profit arena, then jobs should be on the chopping block.

        And, as Yves noted above, the CEOs should be first in line. Instead, just as at Hostess, they are first at the trough to grab all the goodies while regular workers get nothing.

        1. different clue

          I remember reading once (don’t remember when/where) that during the Great Depression the Corporate BizLeader of AT & T decided that not one AT&T employee would be fired due to bussiness shrinkage. Rather, they would all be put on part time to distribute the bussiness-shrinkage over the non-reduced workforce base. At times, every AT&T operator was said to be working 10 hours per week for a while.

  2. Jimbo316

    I’m assuming Goldman Sachs isn’t more than a thousand years old and there’s a typo there but who knows? At some point, the deliberate wasting of skilled human resources, the resulting churn and the increasingly lopsided distribution of incomes and benefits within companies is going to lead either to increasing instability or stagnation in those companies and investers will eventually decide with their feet to move to more sensible and sustainable businesses.

      1. nobody

        YES YES YES YES YES.

        I’ve been revisiting some episodes from Angel Season 5 in the last couple of weeks. Back in the middle of the double-aughts, I thought it was great fiction. Now, I see it through different eyes.

  3. Susan the other

    Or as Josh Brown likes to say, “You enormous fucking idiots; you just fired all your customers.”

  4. Jonathan Kaye

    It’s really a good thing.

    Consider the mighty oak. It grows big and strong for a long time while producing acorns. When the mighty oak reaches maturity it is blown down, struck by lightning or logged. Then the acorns sprout and fill the void.

    Behold the new banks and entrepreneurs who will replace the old CITI timber.

    1. Synopticist

      Dream on chum.
      You seem to think we’re talking about a free market here. Had you been paying attention for the last few years you’d know better.

  5. Quintus25

    “Even more depressing is the fact that concepts like “fairness” and “sharing” are now seen as evidence of bleeding-heart socialism–as though the only way to be a bona fide capitalist is to treat your employees like costs and pay them as little as possible.”

    This sentence encapsulates the rot at the core of our capitalist system. It’s no wonder some studies show close to 1 out of 2 Americans live paycheck to paycheck. How long will this trend continue until there is massive social upheaval? Seriously, is our current economic system the best we as a species can come up with?

    1. Invient

      That is what they want you to think…”The End of History” was written so no one looks at alternative forms of economic organization.

      Neoliberalism survives on propaganda alone.

      1. zygmuntFRAUDbernier

        In Russia, there was a revolution in 1905, before the Revolution of 1917. I learnt this from Wikipedia:
        http://en.wikipedia.org/wiki/Revolution_of_1905

        Prior to the revolution of 1905, there had been:
        “[...]At the same time, the peasant taxpayers’ ability to pay was strained to the utmost, leading to widespread famine in 1891[...]”

        [Wikipedia quoting Skocpol]

      1. rotter

        Id like to see even one prove where Marx was WRONG about capitalism. The only thing they consistently caim was wrong is The Labor Theory of Value and in its place they offer the magical golden egg theory…

    2. psychohistorian

      The current economic system is a mythological cover for the class system of ongoing inheritance, continued accumulation of property and control over global finance. Ultimately, all investment decisions are made by the global inherited rich and their incentive is now to seemingly create this neofedulism.

      It ain’t going to be pretty….

      Of course, WE could do better with a strong public commons but we have to laugh these folks out of control first.

      Keep laughing at the inanity of it all and maybe others will start seeing the light.

  6. Conscience of a Conservative

    Unfortunately you are using the wrong example to support your assertion. Citibank is too big, and the balance sheet can’t support all the old businesses. It got too big and ineffient.

    The CEO is new, so its too soon to speak about the execution, but the idea that you want to downsize and keep/hire the best and the brighest so that the company can grow in the future makes sense. Of course execution is key, and if this nothing more than firing people to pay the politically connected more then that’s something else.

    Citi is trading at roughly half book, the earnings don’t grow except by virtue of financial engineering. Reducing head-count, deploying capital more discreetly and bringing in new talent to grow select businesses, makes sense to me.

    1. Ralph Crown

      That makes sense if the only goal is for Citibank to prosper. Unfortunately, capitalism doesn’t happen in a vacuum. Decisions have consequences. Under the current business model, everyone else has to suffer while the big banks hoover up every excess penny in the economy. We all have to make financial decisions based on the long term, or there won’t be any more long term.

      1. Conscience of a Conservative

        Sorry, businesses earn a profit. If the company can’t make money instead of firing a few, they’ll have to fire everyone.

        1. Ralph Crown

          If the company has to lay off thousands of people, isn’t that an admission that they hired too many people to handle the work they needed done? And if they’re doing it all at once, instead of gradually as their business drops off, isn’t it really about public relations and shareholder confidence rather than pure business sense?

          My basic point was that the workforce needs a little bit of flexibility. “Shedding the dead weight” is a euphemism. I’ve been there. When they fire bunches of people, they don’t necessarily fire the ones who are bad at their jobs, they fire the ones who are bad at sucking up. “Free market capitalism” is honored more in the breach than the observance.

    2. Robespierre

      Oh please can you be that dense? So the new CEO is “fixing” the previous CEOP’s mistakes. Did the previous CEO leave the company poor o rich? Did Rubin leave the company poor or rich? When this CEO leaves the company how much are you willing to bet that he will leave rich regardless of how the company do. The point of the article is that employees are cannon fodder needed to enrich the CEO’s and their ilk regardless of how the company performs

      1. zygmuntFRAUDbernier

        That, and all the over-the-counter derivatives contracts are marked to model, seriously …

    3. bdy

      Reducing head-count, deploying capital more discreetly and bringing in new talent to grow select businesses, makes sense . . .

      Or you can restructure your bonuses to a reasonable multiplier of your employees’ wages, geared to reward long term viability over short-term surplus. You could also perform an accurate, marked to market public assessment of your assets and liabilities without cooking the books. Some kind of bankruptcy or dissolution would naturally follow. You could negotiate that with a sensible, compassionate federal government that recognizes placing you in receivership (temporary or permanent) would allow you continue to operate at a loss until profitability could be resumed (without threatening federal insolvency or going against the bible), and thus allow you and your employees to retain your livelihoods.

      Then you wake up in a puddle, in a world where conscientious, conservative stewardship of a so-called self-regulating economy has made it immoral for states to prioritize giving their citizens an opportunity to live decently. Thankfully you pad your bonus and fire 11,000 douches who had the temerity to imagine they might strike it rich (or just make a living) in finance – the racket where putting people out of their jobs, their homes, and their pensions has never been more necessary . . .

      1. Conscience of a Conservative

        No because the good people and top producers leave and you are then stuck with the dead wood, the opposite of what is needed.

          1. Conscience of a Conservative

            Susan,
            There’s a discussion to be had about Wall Street firms that pay-out all their profits out to employees at the expense of share-holders and bonuses so out-rageous that the share-holders never benefit…however..

            Citigroup is still bloated, with under-perfomers. They need to continue to clean-house, downsize and rationalize their businesses.

            They need to continue to sell businesses with low ROE, get rid of dead wood and invest in higher performing businesses.

          2. Yves Smith Post author

            You’ve just contradicted yourself. You’ve argued that they need to maintain pay level, you’ve now said that the bank is full of underproducers. So they should have their pay cut. You’ve just confirmed the thesis of this post.

    4. Cynthia

      C of a C — Our healthcare system has also become too big and inefficient. Needless to say, there are a lot of healthcare jobs, particularly so-called “leadership” and “coordinator” jobs, which are just fancy ways to describe jobs in management, that aren’t at all cost effective and should be subjected to automation, along with all those other jobs that computers are superior to humans at doing. But very few, if any, of these jobs will be automated, much less replaced by robots, as long as Uncle Sam is picking up the tab, and as long as medical Keynesianism is our overarching answer to our jobless woes.

      1. Conscience of a Conservative

        I disagree, the problems with our health care is that the insured or people receiving treatment don’t have a stake in making sure treat ment is cost effective.

        1. psychohistorian

          The problem with health care is that it is focused on making money, not on providing increasing better health care to the public.

          The base incentives are wrong.

        2. Yves Smith Post author

          That is an utterly ridiculous statement. Tell me how a patient can second guess a doctor’s recommendation about what drugs to take, what tests are justified, or whether to get an operation. I have to fight my doctors tooth and nail over mammograms, which are a lousy diagnostic. I had also had a top orthopedist tell me to have knee surgery which it also turns out was unwarranted (long story here, but a second orthopedic opinion would not have saved me, it was an ambiguous MRI and thank God the jerk doctor threw the MRI report at me when I walked in. A second MRI reading found there was nothing wrong with my knee). And even resistant-to-unnecessary-tests moi got conned by a doctor into getting a $1400 (no typo) totally unwarranted super sensitive echocardiogram.

          Go read Maggie Mahar’s book Money Driven Medicine, which discusses long form why medicine is an example of market failure, and we might have an intelligent conversation.

          1. Sufferin' Succotash

            But but but…people are consumers of health care they can choose whether or not to get sick, can’t they? It’s no different from choosing which brand of bread and butter pickles to buy at the supermarket, right? Caveat emptor, right?
            No, wait…

          2. Conscience of a Conservative

            Of course it’s not rediculous. You’re creating a straw-man. The patient can shop for a cheaper place to do that MRI, where to do the x-ray, out-patient treatment etc. There’s lots of ways.

          3. Lambert Strether

            “The patient can shop for a cheaper place to do that MRI, where to do the x-ray, out-patient treatment etc. There’s lots of ways.”

            Sure. It’s not like health care is a lemon market or anything.

          4. Cynthia

            An MRI, for instance, costs a lot more at a hospital than it does at a freestanding clinic because a hospital has a lot more overhead costs to pay for than a freestanding clinic does. MRIs and other overpriced procedures come to mind whenever I receive one of the thousands of meaningless e-mails from “Nurse Educator Joe” or “Care Coordinator Jill” with a ridiculously long title after their name, or whenever I see one of the hundreds of worthless administrators strutting down the hall like a peacock in a million-dollar suit whose only job is to tell us worker bees what to do. Never mind that we already know what to do. Needless to say, hospitals still suffer from an age-old problem of having too many chiefs and not enough Indians.

          5. Yves Smith Post author

            CofC: No this is a ridiculous statement and your rebuttal (more accurately, a rehash of your statement) is foolish.

            First, most people are in HMOs or PPOs and the DOCTOR determines who does various tests. And on top of that, that can and does undermine efficacy. Doctors use a limited number of labs (only one or max 2) for bloodwork because they know the biases of that lab when it is running the more sensitive tests. And even when you ask the doctor to send bloodwork to a cheaper lab, they may not comply (I’ve had this happen repeatedly, the only way to avoid that is to go to the lab to do the blood draw, and I don’t have time for that). Similarly, I’ve had orthopedists insist MRIs be done by particular service providers because the quality of the image is better.

            Second, the big driver of costs is UNNECESSARY PROCEDURES AND TESTS. So you get it for 85% of the cost of doing it somewhere else? So what? That’s not going to have much impact.

            As I said, go read Mahar’s book. Even a diehard free marker like Tyler Cowen conceded she was right.:

            I was impressed by this book by Maggie Mahar; the subtitle is The Real Reason Health Care Costs So Much. The book has the most coherent, supportable, and fleshed out anti-market story I’ve seen. It both tries to explain why the current system works as it does, and historically how it evolved from more modest and less expensive ways of doing business. It’s not just a rehash of the usual stories about the VA system or France. The discussions of the growth of for-profit hospitals, the increasing specialization of medicine, the problems with pay for performance, and markets for medical devices are all full of interesting tales.

            I interpret the basic story as this: the American health care cost spiral comes from suppliers and their entrepreneurial abilities to market expensive and highly specialized services of dubious medical efficacy. Medical care starts off as ambiguous in value and hard to measure in quality. Customers are cowed by doctors and other family members into accepting or even demanding what is offered to them. Third-party payments make the problem worse, and government intervention has stoked rather than checked the basic dynamic. You end up with massive expenses, lots of stupidity, and – because of its expense — radically incomplete coverage. Every now and then the extra services do pay off, but not frequently enough to boost American stats on health care quality.

            http://marginalrevolution.com/marginalrevolution/2007/04/moneydriven_med.html

            You are just demonstrating ignorance and stubbornness by continuing to argue rather than going to read her book.

          6. Hypothetical_Taxpayer

            Just remembered back in the 80s I designed a brushless DC motor for a med equipment startup. Application? Heart pump in a briefcase! If the ol’ ticker goes out you permanently connect up a tube from briefcase to a suitable major blood vessel and voila! If we pumping – you running!

            I imagine if they diagnose you as paranoid too, there is a model briefcase with a handcuff attached.

            Far as I know it never went commercial, but they will try anything. Did get in trouble with the boss for working on that one, but wtf, I wanted to design a brushless motor, they paid $5k for the prototype, and I had another customer that needed the same design. So I was able to calm the boss down on that one.

        3. different clue

          A major problem with health care is that a lot of the money meant to reach health care is pre-diverted to the health-insurance money-interceptors before it even reaches the performers or dispensers of health care.

          The health care lake trout is supporting the health insuracne lamprey as well as itself. ( Health inSURance workers are one group of people who could/should be mass-layoffed as their so-called “industry” is exterminated so that all the money mis-directed to supporting them could be directed to supporting the providers-practitioners of health CARE instead. In a perfect world those layoffed health inSURance workers would be put on robust unemployment
          support until we could devise other jobs for them to do).

        4. JCC

          I’m a little late to this party, but take it from me, this is a top-down driven problem and not a bottom-up driven problem. Patients do what doctors tell them to do and take the tests that doctors tell them they need. In turn, the doctors do what the hospitals tell them needs doing, as in “We need to pay for this equipment, send me patients!”

          Years ago, and I’m talking 40 years in this case, my father was Chief of Staff at a local hospital in a town large enough for two hospitals. He was in a discussion with a Dr from a neighboring county with 4 or more hospitals and quadruple the population. They were discussing the purhase of the latest rage, a CAT Scan Machine.

          At the time, the county we lived in had a population of 100,000 people, CAT Scan Machines were determined to be cost effective/affordable if they were located in a population center of approx 125,000 to 150,000. The other hospital in our county had purchased one already.

          My father was told that his hospital (a catholic non-profit) was going to purchase one and he fought it tooth and nail. The discussion I was privy to with the other physican dealt with this fight. My father asked for the experience of the other county because they also had multi CAT Scan Systems in their County.

          It essentially boiled down to the fact that my Father was right in his arguments with his hospital:

          “If we buy this thing we are going to be forced to order very expensive CAT Scans that are not needed in order to pay for the damn thing. We already have one in the County that is more than sufficient to cover the entire needs of our entire population. Either that… or we go broke and lose the only non-profit hospital with a 100 mile radius.”

          The other physician said, “You’re right. That is exactly what happened to us. Our hospital told us not to worry, insurance will cover it.”

          And that is exactly what happened.

          My father, now deceased, told me at the time (I was 16 or 17), “You may want to seriously consider being involved with the Health Care Industry in any way as a career. The patient is becoming secondary, profit is paramount. It is corrupt and going to shit. And it is going to get worse. The sooner I retire the better.”

          Pretty prescient for 1970, I think.

          He retired as a full time physician relatively young, about 50, and told me often that “the smartest thing I ever did was get the hell out of that business.” He was right on all counts. Unfortunately, the stress over the years caused by this change in the “Health Care Industry(/factory)” vs. his extreme sense of “The Right Thing To Do” basically killed him within 10 years of his retirement.

          Patients trust their doctors, they have no choice.

          Doctors spend hundreds of thousands to get educated and set up in private practice. They have no choice but to do what they are told. Well, they do have a choice, but bankruptcy and a complete waste of 10 to 15 years of life getting educated isn’t much of a choice.

          The “Industry”, Insurers, Big Pharma, system mfg’s, and private hospitals, drive the costs and could care less about the plight of the patient, or doctor for that matter. They want profit… and they want it now.

          Forty years ago it was, by today’s standards, one lousy CAT SCAN System in one relatively small town. Nowadays it’s every Wonder Diagnostic Tool and Drug Of-The-Day everywhere, and plenty more to come tomorrow. And who knows… after all these profits we may even save a patient or two… or not. Meanwhile, keep em churning, my yacht payment is due. And if there are any complaints, Blame the Patient!

          For those who would much prefer to remain clueless and Blame the Patient, check the health stats of this country vs other countries from 1970 until now (among some other rather obvious clues) and show me the improvements relative to the rest of the world.

          As the great Walter K. said, many years ago, Monday through Friday, 7:00PM Eastern Time, “And that’s the way it is. Goodnight.”

    5. Yves Smith Post author

      DId you LISTEN TO COHAN?????

      Citi isn’t cutting pay of people in its businesses, particularly in well-paid investment banking. This is in contrast with what other banks are doing, if you’ve been following the press here, that is what other banks are doing (I should have underscored that point, even vaunted Goldman is cutting pay, and all the banks in London are wailing about lower pay). If it had been doing that too, these headcount cuts would be a different matter.

      Second, as was mentioned in the post, but I’ll emphasize, Citi has been downsizing since the crisis. It is not widely discussed that Citi’s balance sheet has shrunk by about 10% since the crisis. By contrast, JPM has grown from $1.56 trillion to $2.3 trillion, meaning over 50%. and fellow sick big bank Bank of America has grown more that 10%, from $1.8 trillion to $2.1 trillion (you’d imagine some of the growth is due to the flattering effects of ZIRP).

      Point is Citi has had both regulator and investors’ boots on its neck to fix itself since the crisis and to shed costs and streamline businesses, which is has been doing. If these jobs really were fat, the should have been disposed of already. This looks like Cohen is on target, that a lot of these are cutting little people’s jobs that are not a meaningful part or part at all of Citi’s problems to spare the pay levels of the highly paid bankers.

      1. JB McMunn

        I listened to Cohan. I listened to him say “Sometimes it’s the right thing to do for efficiency” and I also listened to him say “It’s not surprising. This is the kind of thing that needs to happen.”

        1. RalphR

          Yes and those were simply caveats to say that some of the cuts might be warranted, but didn’t negate Cohan’s big point, that the cuts are mainly about preserving pay at the top.

  7. JB McMunn

    I thought this was silly when Josh said it and I think it silly now. If you’re a business with 100 employees and your profits are down 50% and half your employees are sitting around idle what are you supposed to do? Keep everybody on the payroll until the business is dead and nobody has a job?

    As I said in response to Josh’s diatribe on this subject you can find a significant part of the problem by looking in the mirror. It is the people who buy and sell stocks who drive much of the process. The corporations are responding to YOUR behavior. You reward corporate executives for delivering profits when you bid up their stock prices.

    It’s all about the last quarter and prospects for the next quarter. If a company announced that they announced that earnings would be flat for the foreseeable future because they didn’t have the heart to lay people off or cut benefits you’d dump your shares and people would be screaming for the CEO’s head on a spike.

    You want to see earnings growth in the companies you own and when they deliver it you whine about how they do it. You can’t have it both ways.

    Maybe we can devise a system where you a check a box that says, “Please keep my dividend payment and use it to prevent an employee from being fired.”

    1. RalphR

      No, these EXECUTIVES are responding to the fact that THEIR PAY has become substantially equity linked. Equity is a residual claim. Paying employees is higher in their liability chain than paying shareholders.

      Yves left out this part of the Blodget article:

      “In a healthy capitalist ecosystem, companies serve several constituencies, not just owners. Namely, they serve:

      Owners
      Customers
      Employees, and
      Society

      In today’s version of American capitalism, however, too many companies are mostly serving only one constituency: Owners. “Profit maximization” is the number one — and, in many cases, only — priority.

      A few days ago, I confessed that I hoped American corporations would soon put their record-high profit margins to good use — by voluntarily deciding to hire more employees and pay them more…”

      And Blodget is a bona fide owner of his business. He has better justification for being a pig than public company CEOs but he says in the article he doens’t operate that way.

    2. Norcal_Steve

      Nice straw man construction! In case you have not noticed it yet, ‘we’ here are not hedge fund managers or in most cases not even small scale owners of bank stocks. We’re the general public who have seen our real estate value and title system shot to shit, our economy crashed (and still burning deep within the corporate compost heaps) by these masters of finance who keep taking the multi-million salaries and bonuses when they fail and getting massive injections of capital from the Fed at interest and at costs especially at time of crisis they created and which would have destroyed them if there were any real “market forces” governing financial services, costs way, way below fair market value of the crisis, hail mary, infusions of critical capital.

  8. ArkansasAngie

    Personally I’m more concerned that it is apparently ok that 70% of the economy is consumer spending.

    1. G

      It p. much has to be. We can’t have an economy based on 70% investment, and it’s impossible for every country to be a net exporter – leaving government spending.
      The govt. could (and should) step up in providing healthcare and education services, but I don’t think it should be 70% of the economy either.

      I don’t think nothing’s naturally wrong with “consumer spending”. Only how we choose to allocate that spending.

  9. Pelham

    “Neofeudalism” sounds good and I, too, hope it gains currency.

    Still, it’s too kind a term. Lords under feudalism bore some responsibility toward their inferiors. Capitalism is a good deal worse than that as our lords don’t give a flip whether the working people who generate their vast wealth for them live or die. Come to think of it, even slave owners had more concern for their slaves, in whom they had an investment and hoped to keep alive.

    1. Beppo

      You’re quite right. You can look backwards at capitalism being invented as a stripping away of feudal assumptions of stewardship over your peasants.

      Of course, this is why reactionaries are so into the idea of charity. I’m the big man and I decide who lives and dies.

    2. nobody

      Come to think of it, even slave owners had more concern for their slaves, in whom they had an investment and hoped to keep alive.

      My understanding is that the average life expectancy on a sugar plantation was something like 7 years. It made more sense to the owners to work slaves to death and replace them, rather than keeping them alive and healthy.

      1. rotter

        yes thats how the capitalist system works now..wring every ounce of labor power out of employees then get rid of them for some newer sheaper versions…

      2. Sufferin' Succotash

        That was true of West Indian sugar plantations–when the French owned Haiti they had to import about 100,000 slaves a year simply to maintain a slave population of around half a million.
        That was not true of slavery in North America where the climate and working conditions were not so brutal and where the slave population could actually grow by natural increase. That was one reason why the Framers of the Constitution had no trouble abolishing the importing of slaves: the planters didn’t really need it.
        BTW, I’ve always had trouble with the term “neofeudalism” as a way to describe the emerging economic regime. Feudalism–at least at it appeared in Western history–entailed some degree of reciprocity. The lords owed security of land tenure and protection to the serfs in return for lifetime dependence and service. “Neocolonialism” might be a better term, but it will be a chore convincing white folks that they’re actually being colonized.

  10. Blue Meme

    Can’t tell if this is a typo or snark:

    “But given how aggressive banks have been in wringing efficiencies out of their operations…”

    I would agree that the financial services industry has been amazingly successful at throwing out MARKET efficiencies wherever possible, but perhaps you meant to say INefficiencies?

    1. Yves Smith Post author

      Yes. Banks analysts talk all the time about efficiency ratios, which is bank expenses ex interest/revenues. Banks have lowered that ratio hugely over time. For instance, this “stylized bank” meaning meant to be typical, in a 1991 paper had an efficiency ratio of 72%. The efficiency ratio of FDIC banks was 55% as of 2010:

      http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1991/11/01/000009265_3961002034547/Rendered/PDF/multi_page.pdf

      https://www.fmsinc.org/uploadedFiles/Site_Home/Events_and_Education/The_Finance_and_Accounting_Forum/Cobb-01(1).pdf

  11. JB McMunn

    Executive pay is a separate issue, but the problem is due at least in part to stupid laws with unintended consequences.

    Executive Compensation: The Fallacy of Disclosure

    Paolo Cioppa, University of California at Berkeley
    Abstract

    Incentive compensation has been used through history by those in charge as a means of achieving performance goals and positive financial objectives. Since the early 1990s, the United States Securities and Exchange Commission has approached executive compensation as a matter of disclosure. In 1992, the Commission adopted its new executive compensation proxy disclosure rules; the regulatory changes were adopted in response to complaints that the compensation paid to corporate executives had become excessive, and in the hope that the new regulation could produce an increased shareholder awareness that would make executives more accountable to the shareholders. Data on executive pay shows that SEC-mandated, detailed disclosure of information of executive compensation has not reduced the United States level of compensation of officers. While, arguably, disclosure generates a greater understanding of corporate executive pay for the shareholders, the availability of these numbers constitutes also an enormous advantage for CEOs and CFOs. Indeed, unless paid at a level equal to, or above the market average, a CEO/CFO may well decide to move to a different corporation. This problem makes retention a crucial issue in all public corporations and contributes to further driving executive pay to excessive levels. In addition, the Sarbanes-Oxley has not directly assessed, nor really improved, the mechanisms for compensation. Instead of decreasing excessive executive pay, public knowledge of salaries has created in the United States a sort of “race to the bottom” in which companies have to be willing to pay unjustifiable amounts of money to retain good management. While this history should have shown the Commission that disclosure will not suffice in the area of executive compensation, its staff, once again, has decided to enhance disclosure of executive pay in order to curb the problem of excessive pay packages. This paper argues that there is no reason to believe that enhanced disclosure will produce the desired effect.

  12. briansays

    but you need to understand
    the cost of buying politicians in the second tem of the administration is going up

  13. kevinearick

    the more people they have to fire, the more they must be paid…for risk…like a bullet to the head. It’s a lottery economy….capital pushes the middle class over the cliff, but operates UNDER THE ILLUSION that it is seperable.

  14. rich

    Oligarchs Remain Obstacle to Growth

    But as Greece’s economy soured in recent years, his fortunes sagged and he began embezzling money from a bank he controlled, prosecutors say.

    Greece’s economic troubles are often blamed on a public sector packed full of redundant workers, a lavish pension system and uncompetitive industries hampered by overpaid workers with lifetime employment guarantees. Often overlooked, however, is the role played by a handful of wealthy families, politicians and the news media — often owned by the magnates — that make up the Greek power structure.

    The result, analysts say, is a lack of competition that undermines the economy by allowing the magnates to run cartels and enrich themselves through crony capitalism. “That makes it rational for them to form a close, incestuous relationship with politicians and the media, which is then highly vulnerable to corruption,” said Kevin Featherstone, a professor of European Politics at the London School of Economics.

    http://www.nytimes.com/2012/12/06/world/europe/oligarchs-play-a-role-in-greeces-economic-troubles.html?

    hmm…sounds familiar.

  15. Fíréan

    Some of the text within the quoted part of this article is duplicated.
    from “Why?” though to
    “……. dedicating their lives to helping the companies earn such vast profits ”
    Not meaning to seem pithy, yet also wondering how many other people read th wholw text ?

  16. DidierF

    This paper expresses the very reason why “supply-side” economics is such a love for the elite. It justifies what you denounce.

    I’d use the word suicide of our civilisation for describing this tendency towards “maximization of profits”.

  17. Procopius

    I’ve been getting the feeling lately that this is like The Tragedy of The Commons. I expect an economist would have a better phrase for it. The prevailing business model seems to be to use the imbalance of bargaining power to drive down the wages of the employees while increasing the compensation and perquisites of the executives. As long as everybody does it it works, until the employees don’t have enough income to support the system, when everything collapses. No one company can afford to pay their employees more, because that would put them at a competitive disadvantage, or they think it would. Alternatively, a few companies can pay their employees more, thereby gaining great employee loyalty and the best, most skilled, workforce, leading to lower turnover costs and greater profits from increased productivity, but not all companies can do this or they would have to start paying their executives less. This is unacceptable, as in the case of General/Fleet officers in the military — Gates found that their perquisites (security, servants, private use of jet aircraft, etc.) was a third rail he could not touch.

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