Quelle Suprise! Banking Profits Might Be Due to Big Government Subisdies!

Actually, despite the somewhat churlish headline, the story “Bailout Helps Fuel a New Era of Wall Street Wealth,” by Graham Bowley at the New York Times, is a solid job of reporting and does not tiptoe around the issue of the big bennies that the financial services industry is enjoying and their role in creating outsized profits. It also makes a distinction, which has escaped many writers, that the firms that are doing really well are the big capital markets players, not conventional banks (or firms like Citi and Bank of America, that are capital markets firms with very substantial commercial banking operations). It was the markets that the powers that be were panicked to save (debt is now heavily intermediated on over-the-counter credit markets, vastly less on bank balance sheets than it once was). And with the subsidies directed mainly at shoring up credit markets and the firms that own and operate the crucial trading infrastructure, it should be no wonder that the players that were most deeply involved are showing the greatest gains.

The reason for the tart headline is that this view should be conventional wisdom by now (well, it is among folks who understand financial services, but not in the wider world). And it should have been widely commented on when first and second quarter bank earning came out,. Instead the meme was “isn’t it wonderful those banks we thought were dead are actually making money!” No one wanted to look to closely and ascertain that the pretty profits were the result of government props, not sounder fundamentals. The one who came closest to saying the truth was Meredith Whitney, who described the earnings as “manufactured” (recall the role of AIG swaps unwinds in 1Q results) but added that the banks could keep it up for another quarter or two.

The New York Times story warm up indicates that comparatively few are in on the role of the government support in the supercharged profits. The price provides a short recap and notes that the Federal aid is contributing to lofty bonuses:

It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington. Many of the steps that policy makers took last year to stabilize the financial system — reducing interest rates to near zero, bolstering big banks with taxpayer money, guaranteeing billions of dollars of financial institutions’ debts — helped set the stage for this new era of Wall Street wealth.

Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder — a benefit of less competition after the failure of some investment firms last year.

So even as big banks fight efforts in Congress to subject their industry to greater regulation — and to impose some restrictions on executive pay — Wall Street has Washington to thank in part for its latest bonanza…

Not all banks are doing so well. Giants like Citigroup and Bank of America, whose fortunes are tied to the ups-and-downs of ordinary consumers, are struggling to turn themselves around, as are many regional banks.

It is admittedly a high level treatment (for instance, it does not enumerate the various types of support, but does make clear it extends well beyond the TARP) but delivers its message in a clear, matter-of-fact, and unqualified fashion.

Some economists and bloggers have been on this theme (the extent of the subsidies and the lack of quid pro quo for the taxpayer) for quite some time, and their drumbeat continues. One salvo comes today from Jesse in “How Goldman Sachs Leveraged $70 Billion in Government Money For Record Profits.” While this is admittedly close to conspiracy theory, most investment professionals I know regard the latter phases of the stock market rally with great suspicion (too much end of day tape painting, too many heavy handed short squeezes, continued thin volume, and suspicious moves on indexes when they near levels that are significant to technicians). That of course begs the question, “If the market is being manipulated, how and by whom?” When I worked with the Japanese, it was widely known that the Japanese securities firms manipulated the markets and the politicians were tipped off early and bought stocks the brokers were about to ramp (look, if I as a mere gaijin heard about it, it was hardly secret). Yet when it came out in the Japanese media years later, it was treated as a huge scandal. I was and am perplexed that a widely-known practice could be treated as such a remarkable event. I regard much of this rally as a similar open secret, except how this is being carried out is a mystery (is this mere trader opportunism and brute force that looks like collusion, with the perps secure in the knowledge that the government won’t act against rule violations, since the outcome serves their interests, or something more deliberate?)

On the wonky/policy end of the spectrum, Willem Buiter continues to be Not Happy about the wondrously bank-friendly regimes that have been put in place. He provided some commentary from János Kornai on one of his ideas, that of soft versus hard budget constraints (Buiter had invoked the idea in a post earlier in the week).

The problem is that the concept is important, but this (established) turn of phrase does not slip swimmingly off the tongue. A hard budget constraint means when you run out of something (dough, usually, but it could be other scarce resources) you are stuck. No magic fairy dust to rescue you. Kornai explains:

To simplify matters, a contrast is often made between the soft and the hard budget constraint. In fact there are grades between these two extremes. The budget constraint that corporate decision-makers sense may be very soft, moderately soft, quite hard and so on, depending on their subjective awareness of the probability of rescue….

Let us turn for a minute to the dawn of capitalism. A debtor unable to pay was threatened by the debtors’ prison. Business failure in the early period of capitalism was more than a fatal material blow, for it ruined the bankrupt’s moral reputation. The budget constraint in those days was still absolutely hard. The perilous results of loss and indebtedness forced entrepreneurs to be extremely cautious.

But the historical development of property relations and the credit system gradually brought essential changes. The principle of limited liability became legitimated, and joint stock companies based on that new principle appeared. At the same time, the hitherto close connection between the material and moral position of decision-makers and the financial state of their companies became weaker.

As property and management separated, so the relation weakened between the individual destiny, income and reputation of the managers making the practical business decisions on the one hand, and the presence or absence of financial destinies of their companies, on the other. Successive legislation on business failure provided some protection for firms caught up in a spiral of debt. These changes and others not mentioned here contributed to a steady softening of the budget constraint….Early capitalism rewarded success richly and punished failure fiercely. As time went by, the rewards not only remained, but in several countries increased dramatically, while the penalties became lighter. That disproportional change has weakened the incentive for business to pursue efficiency and adaptability to change. It encourages irresponsible decisions on borrowing, investment and expansion.

The one bit I find troubling with Kornai’s discussion is he conflates soft budget constraints with socialistic regimes, namely the sort he saw in Hungary in the late 1960s, when companies were urged to adopt “market socialism” but that meant that if the manager did well, the company got a bonus, but if the company produced a loss, no matter, the state would fund the shortfall.

But this is not a function of socialist systems per se; it took place in all the examples that George Akerlof and Paul Romer cited in their classic 1994 paper on looting, and included the Chicago School free market experiment in Pinochet’s Chile, which resulted in a plutocratic land grab. To put it more simply, “socialized losses” can occur under a socialist system (where the goal is to preserve employment), in looting (where lax regulation and accounting allow companies to report largely bogus profits and syphon out funds, either directly to the owners/managers, or to affiliated companies), or in Mussolini-style corpocracy.

Note that Korzai stresses that rescues per se are not bad things, provided they are made judiciously and infrequently:

Softness of the budget constraint cannot yet be said to apply in a singular case where a firm in deep financial trouble is bailed out. The syndrome appears if such rescues occur frequently, if managers can begin to count on being rescued. We face here a mental phenomenon, an expectation in decision-makers’ minds that strongly influences their behaviour.

It isn’t hard to imagine that with a clear “no more Lehmans” policy in force in the US, UK, and EU, that banks are very well conditioned by now to expect a rescue if they screw up.

Separately, even the Times manages to undercut the pointed message of its story on source of bank profits with another story today: “All This Anger Against the Rich May Be Unhealthy.” A cultural aside: since the early 1800s in England, there was a distinction between the deserving and undeserving poor. Someone who was able to work but didn’t was undeserving (there were other ways the line might be drawn, but that was one of the most consistent). We see that carried through today (when talking about those over their heads in debt, some readers like to demonize them all as profligate, while others jump in and point out how, for instance, medical expenses can push a lot of people who had lived reasonably within their means into debt pronto. Again, it’s a “deserving v. undeserving” distinction.

Given the row over the suspect level of pay in certain areas of finance, it may be time to apply that notion to the upper end of the food chain more formally. Most people have no problem with self made men and women making a lot of money; heck, that’s the American dream. The fact that the “if you are rich, you must be deserving” Calvinist assumption is beginning to be questioned is positive; we just need to be careful not to replace old stereotypes with new ones.

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  1. catkiller

    Economies are like any other utility. After a certain number of generations, people forget what it cost. They take it out for a spin, get drunk, and run it off the road. Then, when they wake up from their stupor, they expect it to be there, ready and waiting for another round. Considering what this one has been through, it served its users quite well.

    From the perspective of the crafters, who is going to get the next economy? Someone that will immediately run it off the road, or someone who is going to appreciate it? Best to let these people keep using the old one.

    1. Skippy

      At Jekyll Island, August Belmont was present. His real name was Schoneberg (spelling). He was sent directly by the Rothschild Family to represent them since none of the younger Rothschilds at the time wanted to come to the US. In addition Jacob Schiff (spelling) was there. Who was he? Well, He started worked as a boy in one of the Rothschild Banks (I believe Germany) and was sent to the US.

      Next, Peirpont Morgan, father of the famous John Peirpont Morgan, got his start with the Rothschilds of London. They had him handle all US bonds and rail-road investments.

      Now add to this Paul Warburg. Who was he? Part of the Hamburg Germany Warburg banking family and married to the Schiff-Loeb Investment house. All linked. All related. Paul was the real author of the Fed plan and was representing his family bank. < OFF Mishs site.

      Skippy…I had a great time at Jekyll Island too, only it was via 5mi swims in shark infested waters (day/night) out of a CH-47D, bad luck the scuba master was never found and what a hoot watching *dear hunter* at the local movie theater with a platoon of chaps in black hats (Top tried to get a church discount, but failed). I still wonder what scared them the most, the movie, or us…ah the good times…seems others shared the Islands fortunes too.

  2. attempter

    Whether or not there’s any longer a distinction between “deserving” or “undeserving” rich (it seems harder and harder to find sectors where real innovation, as opposed to “innovation”, is still occurring), it seems clear that concentrated wealth itself no longer does anything but rent-seek.

    It’s simply socially harmful in itself. Whatever the cause and effect, since the 70s the real economy has been hollowed out and replaced by an economy based on debt and asset bubbles, and the disaster capitalism following upon crashes.

    So whatever tactical political use such a deserving-undeserving distinction may have, it looks objectively irrelevant. Wealth seems simply incapable of functioning in any other but a corporatist way.

  3. Riggsveda

    Yves, I usually just content myself with reading here , but your posts lately have been so outstanding I just had to check in long enough to say “Brava”! Thanks for being so consistently readable and sensible.

  4. craazyman

    Financial Rapists

    “Words are the nodal points of numerous ideas, and are therefore predestined to ambiguity.”
    -Sigmund Freud, The Interpretation of Dreams

    “Poets are the unacknowledged legislators of the world”
    -Percy Bysshe Shelly

    The technical argument for why firms that leverage beta using the taxpayer’s balance sheet are looters is clear to anyone who remotely understands global finance and central banking. I suspect it’s also clear, at some level of mind and intellect, to the some of the people doing the looting. To many of the shallower and more reptilian minds involved — which constitute no doubt a dissapointingly large percentage — it admittedly is probably not. Power and profits, to them, are the only moral justifications needed. As both are no doubt, at some level of inarticulated but instinctively accepted reasoning, deserved.

    Financial looting is not now constrained by law, by regulation, or at the individual level, by a sufficiently powerful moral conscience. The easy justification for it is that it is somehow socially necessary to “save” the system. And that the skills involved are “worth” the price paid by society — which includes near-zero interest rates for savers and widespread fiscal and monetary disorder that innervates democracy and sickens spirit of the people.

    Yet society, in fact, is probably lucky that folks with skills such as these can “come to the rescue” and “reboot the economy” for the benefit of all. So states a certain “wisdom”, no doubt.

    “Looting” is a reasonably violent word that conveys with some degree of accuracy what these men and women are doing. But it’s a word that implies an anonymity of both perpetrator and victim in the context of this usage, with an inneffectual abstraction that lacks semiotic power. It flies through the cinema of the mind like an invisible gust of wind, unarrested and un-stilled by any imagery that is sufficiently shocking and provocative of moral reasoning.

    The language of political and social change needs a more muscular power and an imagery that arrests and convinces at an unconcious level — this is a prerequisite for a broader social turn of collective consicousness. Certainly the banksters and their lobbyists rely on this aspect of language in their own dealings with politicians and academics, and the political and economic establishments are complicit in the acceptance of a veritable thesaurus of synonyms that defang “looting” into “providing liquidity to markets”, “intermediating capital flows”, “compensating talent”, “creating efficiencies”.

    A more effective phrase that describes the legally permitted looting of the taxpayer is “financial rape”. The imagery is stark and unambiguous, the metaphor is truthful at a structural level, and the notion of a personalized victim and a heinous and brutal action is uncomfortably and effectively conveyed.

    The wife who sees her wealthy bankster husband as a “rapist” is likely to be pitched headlong on an uncomfortable path of self-reflection. The man who wonders in some corner of his mind if he really is a “rapist” may be more amenable to contemplation and enlightened regulation. A society that defines privatized gains and socialized losses as a form of “rape” may be more willing to demand the political and regulatory changes needed.

    The word is not so hysterical as to immediately lose it’s descriptive legitimacy, as are the frequent description of political enemies as “Nazis”.

    No, rape is a good and accurate word. And when firms counterfeit credit, inflate profits falsely, blow themselves up, get bailed out by taxpayers, pay bonuses with taxpayer monies and laugh in your face — they are raping you and they are “rapists” at an elemental level.

    And so the good men and women, the MBAs, CFAs, the gentle yoga class going, bottled water drinking, organic food eating, marathon running and symphony going worker bees in the brutal corners and principal trading desks of the financial industrial complex — Yes, you are “rapists”. And you, central bankers, academics, bailout lobbyists and regulator enablers. You are aiding and abetting financial rape.

    You don’t like that word, do you? It makes you get angry and squirm a bit.

    Yeah, that’s the point.

    Now think about it. And imagine what if feels like for the person underneath you, while you’re doing it to them.

    1. AvgJohn

      True, but I wouldn’t be too inclusive with whom I classified as innocent victims.

      Like a seductively dressed vixen who has researched the life habits of a celebrity, arranged to meet him in a bar, seduces him and accompanies him to his hotel room one evening, moans with pleasure, then cries rape the next day while filing her civil law suit, so to are there are plenty of so-called “innocent” victims of the “financial” rape that winked, nodded, and otherwise enabled the perpetrator.

      There are too many of us that, to one degree or another, have some personal responsibility for this financial/moral crisis, if for nothing else than our silent response to “the good times” when the moral decay began to permeate our government, business environment and general culture.

  5. i on the ball patriot

    As to the distinction between the “deserving and undeserving” rapist — ‘penetration, however sleight, is enough to complete the incident’.

  6. DownSouth

    Yves said: “it’s a ‘deserving v. undeserving’ distinction”

    Now that’s a minefield.

    Rousseau believed that what is preferable when society and property have become established and the inequality of talents is revealed, is that ability should be rewarded for the advantage of the community. This stage, Rousseau says, is the happiest and most lasting in the history of mankind. When in time wealth and rank no longer correspond to merit, the disparity becomes an injustice and leads to instability (Jacques Barzun, From Dawn to Decadence).

    The rub, however, is how we define “deserving” and “undeserving”?

    “Since inequalities of privilege are greater than could possibly be defended rationally,” Reinhold Niebuhr wrote in Moral Man & Immoral Society, “the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interests are served by, the privileges which they hold.”

    And up until Marx, that “intelligence” was applied to the denigration of the “deserving distinction” of labor. “As the elementary activity necessary for the mere conservation of life, labor had always been thought of as a curse, in the sense that it made life hard, preventing it from ever becoming easy and thereby distinguishing it from the lives of the Olympian gods,” Hannah Arendt writes in “Karl Marx and the tradition of Western political thought”. Those who did “work for others to free them from fulfilling the necessities of life themselves were known as slaves.”

    “Marx is the only thinker of the nineteenth century who took its central event, the emancipation of the working class, seriously in philosophic terms,” Arendt goes on to explain. “Marx’s great influence today is still due to this one fact…” “The really anti-traditional and unprecedented side of his thought,” she continues, “is his glorification of labor, and his reinterpretation of the class—the working class—that philosophy since its beginning had always despised.”

    But was the Marxist faith in the working class, that the workers were the “producers,” the only creative element in society, justified? Arendt in Crises of the Republic indicates that it was not:

    The enormous growth of productivity in the modern world was by no means due to an increase in the workers’ productivity, but exclusively the development of technology, and this depended neither on the working class or on the bourgeoisie, but on the scientists. The “intellectuals,” much despised by Sorel and Pareto, suddenly ceased to be a marginal social group and emerged as a new elite, whose work, having changed the conditions of human life almost beyond recognition in a few decades, has remained essential for the functioning of society. There are many reasons why this new group has not, or not yet, developed into a power elite, but there is indeed every reason to believe with Daniel Bell that “not only the best talents, but eventually the entire complex of social prestige and social status, will be rooted in the intellectual and scientific communities.”

    (And sorry economists, Arendt didn’t consider economics and other fields of social inquiry to be science, but instead pseudo-science, more akin to religion than a bona fide intellectual endeavor.)

    Nowhere does the abstract and arbitrary nature of the “deserving v. undeserving distinction” become more manifest than in the art market, which serves as kind of a mirror on society, reflecting its values, attitudes, beliefs and opinions.

    George Orwell wrote an incisive essay where he delved into the huge financial success of Salvador Dali. He said the inordinate financial rewards heaped upon Dali “probably cast useful light on the decay of capitalist civilization.”

    The point is that you have here a direct, unmistakable assault on sanity and decency: and even—since some of Dali’s pictures would tend to poison the imagination like a pornographic postcard—on life itself. What Dali has done and what he has imagined is debatable, but in his outlook, his character, the bedrock decency of a human being does not exist. He is as anti-social as a flea. Clearly, such people are undesirable, and a society in which they can flourish has something wrong with it.

    One would like to know, Orwell ponders, “why the rentiers and the aristocrats should buy his pictures instead of hunting and making love like their grandfathers.”

    Time Magazine art critic Robert Hughes gives us another compelling example of aristocrats and rentiers gone mad with the multi-million dollar prices they pay for art works of questionable value:

    It’s bad to use words like “genius” unless you are talking about the late Jean-Michel Basquait, the black Chatterton of the 80s who, during a picturesque career as sexual hustler, addict and juvenile art-star, made a superficial mark on the cultural surface by folding the conventions of street graffiti into those of art brut before killing himself with an overdose at the age of twenty-seven. The first stage of Basquiat’s fate, in the mid-80s, was to be effusively welcomed by an art industry so trivialized by fashion and blinded by money that it couldn’t tell a scribble from a Leonardo. Its second stage was to be dropped by the same audience, when the novelty of his work wore off. The third was an attempt at apotheosis four years after his death, with a large retrospective at the Whitney Museum designed to sanitize his short frantic life and position him as a kind of all-purpose, inflatable martyr-figure, thus restoring the dollar value of his oeuvre in a time of collapsing prices for American contemporary art.
    –Robert Huges, Culture of Complaint

    And on the pages of today’s New York Times we have yet another example of rentiers and aristocrats gone mad with their purchase of the works of Damien Hirst:


    Last September the billionaire-artist walked away with a cool £95m from an auction of his works:


    As Dutton points out, Hirst doesn’t even create the artworks he sells. He only furnishes the design. His worker-bees do the actually creation. “The appreciation of contemporary conceptual art…depends not on immediately recognizable skill, but on how the work is situated in today’s intellectual zeitgeist,” Dutton theorizes. The work Dutton uses as an example, estimated to bring up to $239,000 at auction Friday night at Christies London, is “literally a small, sliding-glass medicine cabinet containing a few dozen bottles or tubes of standard pharmaceuticals: nasal spray, penicillin tablets, vitamins and so forth.”

    “You have to be an intellectual to believe such nonsense,” Orwell observed. “No ordinary man could be such a fool.” Orwell was talking politics when he coined this aphorism, but he might just as well have been referring to the art world in the 20th century and beyond.

    Looking at all this, one has to wonder whether the rentiers and aristocrats are not setting themselves up for another reign of Terror like that which followed in the wake of the French Revolution. It was, after all, the “mores and ‘moral’ standards, the intrigues and perfidies of high society, to which the lower strata responded by violence and brutality,” as Arendt observes in On Revolution. Louis XIV knew to keep the “willfully corrupted manners” of Court society “apart from the style in which he conducted affairs of state.” His successor, Louis XVI, did not.

    1. kevin de bruxelles

      Down South,

      Great comment as usual.

      But amazingly enough, I’m going to try to make the case for aristocracy, and not just because my alias is a weak attempt to mock an aristocratic name.

      All human societies stratify into social hierarchies, as do most animal species. Even some of the primitive tribes that Darwin observed and believed to be perfectly egalitarian have been shown to have social hierarchies; for example the best hunters tend to mate more often and pass on their genes. This inequality seems not only natural but vital for the survival of these tribes.

      As societies grow more complex the inequalities are much greater and ideally the more intelligent members of the group would rise to the top of the social hierarchy; although as for passing on their genes, that function of the social filter usually falls away as the peasants out produce the scientists in the baby department.

      I’ve split my adult life between Europe and the US and I have noticed a difference in the way the two societies grant social status. In the US, generally speaking, social status is normally based on wealth, with more being better, and much more being much better.

      In many parts of Europe, certainly Belgium, social status is to some extent still set by ancestry. This isn’t at all to say that others don’t rise to the top, they certainly do, but their trajectory is damped by the aristocratic model. One of the great difficulties I had in adjusting to life in Belgium was working closely with aristocrats. Here most aristocrats work white collar jobs and are moderately wealthy. They stand out because they have special surnames, usually featuring a “de”. Normal people tend to defer to them in an office environment and obviously the aristos quickly rise to leadership roles, whereas in the US talent plays a larger role. This angered me and I used to get in a lot of arguments with my aristocratic colleagues.

      But the other thing that anyone would notice is that the gap between rich and poor is much less in Europe than in the US. On the bottom half of society this can be credited to a large part to the Social Democratic parties who were so successful in the 20th century that the current Socialists in Europe don’t have much of a mission left. But the main factor on the top half is that rich people here are not as acquisitive due to the dampening effect that the aristocracy plays on upper class attitudes towards what constitutes social status.

      And this is where their strange habits in buying art come in. Bloodlines alone as a factor for deciding social status certainly leaves something to be desired. Culture jumps in to the rescue with the aristocratic class seeking further social distinction though esoteric taste in the various arts among other things. While somewhat annoying to the working class sensibility, I much prefer my social betters concentrating trivial art instead of concentrating dwindling wealth in their pursuit of social status.

      1. DownSouth

        kevin de bruxelles,

        Art is a tyranny of talent and beauty.

        And while aristocrats have never comported themselves like angels, at least the aristocrats of old knew and patronized good art. Their legacy included the Pietà, the Statue of David, the Sistine Chapel, the Mona Lisa, the Last Supper and The Birth of Venus, just to name a few of the better-known examples.

        But this current crop of incompetent buffoons? What will be their artistic legacy? A medicine cabinet? A formaldehyde-filled tank with a pickled shark inside? Testaments of politics-as-art conceived to glorify greed and the “red in tooth and claw” ideology of the ruling class?

        Robert Hughes tells the following story to illustrate how, even though some Renaissance art patrons were degenerate scoundrels, they nevertheless were sublime aesthetes:

        Nobody has ever denied that Sigismondo de Malatesta, the Lord of Rimini, had excellent taste. He hired the most refined of quattrocento architects, Leno Battista Alberti, to design a memorial temple to his wife, and then got the sculptor Agostino de Duccio to decorate it, and retained Piero della Francesca to paint it. Yet Sigismondo was a man of such callousness and rapcity that he was known in life as Il Lupo, The Wolf, and so execrated after his death that the Catholic Church made him (for a time) the only man apart from Judas Iscariot officially listed as being in Hell—a distinction he earned by trussing up a Papal emissary, the fifteen-year-old Bishop of Fano, in his own rochet and publicly sodomizing him before his applauding army in the main square of Rimini.

        William Manchester in A World Lit Only by Fire picks up on the same theme:

        In an ideal world, genius should not require the largess of wicked pontiffs, venal cardinals, and wanton contessas. But these men of genius did not live in such a world, and neither has anyone else. In art the end has to justify the means, because artists, like beggars, have no choice. Other ages have provided different sources of support, though with dubious results. Five centuries after Michelangelo, Raphael, Botticelli, and Titian, nothing matching their masterpieces can be found in contemporary galleries. No pandering to popular tastelessness, adolescent fads, or philistine taboos guided the brushed and chisels of the men who found immortality in the Renaissance. Political statements did not concern them. Instead they devoted their lives to artistic statements, leaving time to judge their wisdom.

        It is uncontestable that the Continent’s most powerful rulers in the early sixteenth century were responsible for great crimes. It is equally true that had this outraged the painters and sculptors of their time we would have lost a heritage beyond price. Botticelli pocketed thousands of tainted ducats from Lorenzo de Medici and gave the world The Birth of Venus. In both temperament and accomplishments Pope Julius II was closer to Genghis Khan than Saint Peter, but because that troubled neither Raphael nor Michelangelo, they endowed us with the Transfiguration, David, the Pietà, and The Last Judgment. They took their money, ran to their studios, and gave to the world masterpieces which have enriched civilization for five hundred years.

        Now look at the “masterpieces” today’s rulers are buying with their plunder. How many centuries do you think they’re going to “enrich civililzation”? To repeat what Orwell said again: “You have to be an intellectual to believe such nonsense. No ordinary man could be such a fool.”

        1. kevin de bruxelles

          My point was only that it is better for elites to compete on the cultural and genetic playing field instead of just fighting over whose pile of gold is higher. On the question of art I am with you on anything post-Mondrian. I was recently heavily criticised by an in-law for missing the Museum Ludwig (which primarily houses contemporary art) after a visit to Cologne but at the time it seemed such a better use of my time to instead sit outside and test various German beers in a cafe.

          Not that it matters but many (certainly not all) of the real aristocrats I know tend to be quite conservative (in the true sense of the word – wanting to go back to the ancien régime) in both art and politics and reject any developments in both areas after the French Revolution.

          Fear of kitsch is what is driving collectors and artists towards bizarre and mediocre art. Today, the value of art is not determined by the intrinsic quality of the piece in question; no, art’s value is determined by how different it is from anything Thomas Kinkade would produce.

          1. DownSouth

            My position is that today’s rulers are neither aristocratic nor elite.

            Aristocrats are elites by birth. They are not required to demonstrate any exceptional talent, ability, training, intellect or morality (though of course many do) in order to maintain their exalted status in society.

            But it hasn’t always been that way. As William Manchester explains:

            Royalty was invested with glory, swathed in mystique, and clothed with magical powers. To be a king was to be a lord of men, a host at great feasts for his vassal dukes, earls, counts, barons, and marquises; a great giver of rings, of gold, of landed estates. Because the first medieval rulers had been barbarians, most of what followed derived from their customs. Chieftains like Ermanaric, Alaric, Atilla, and Clovis rose as successful battlefield leaders whose fighting skills promised still more triumphs to come. Each had been chosen by his warriors, who, after raising him on their shields, had carried him to a pagan temple or a sacred stone and acclaimed him there… Lesser tribesmen were grateful to him for the spoils of victory, though his claim on their allegiance also had supernatural roots…

            Hereditary monarchy, like hereditary nobility, was largely a medieval innovation. It is true that some barbarian lieutenants had held office by descent rather than deed. But the chieftains had been chosen for merit, and early kings wore crowns only ad vitam aut culpam—for life or until removed for fault.
            –William Manchester, A World Lit Only by Fire

            As Manchester goes on to point out, with the passing of time primogeniture became more common. Secular leaders tried to “maintain the fiction that sovereigns were elected,” but by the end of the Middle Ages “this pretense had been abandoned.” With the triumph of Christianity, religion replaced merit as the justification for rulership. “The conspicuous sacerdotal role in the crowning of kings, who then claimed that they ruled by divine right, was characteristic of Christianity’s domination of medieval Europe,” Manchester tells us.

            I am not by any stretch of the imagination arguing against elites or elitism. Quite the contrary, I am in total agreement with Robert Hughes when he writes:

            Democracy’s task in the field of art is to make the world safe for elitism. Not an elitism based on race or money or social position, but on skill and imagination. The embodiment of high ability and intense vision is the only thing that makes art popular. Basically, it’s why the Rijksmuseum is full of people and the remedial art-basements of Amsterdam are not. The greatest popular spectacles in America are elitist to the core: football games, baseball games, basketball, professional tennis. But nobody is going to pay to watch Hilton Kramer and me swim the 800-meter freestyle in 35 minutes flat, despite our privileged position as not-quite-dead white European males. Like sport, art is an area in which elitism can display itself at a negligible cost in social harm.

            Or when he writes:

            For when the 1960s animus against elitism entered American education, it brought in its train an enormous and cynical tolerance of student ignorance, rationalized as a regard for “personal expression” and “self-esteem.” Rather than “stress” the kids by asking them to read too much or think too closely, which might cause their fragile personalities to implode on contact with college-level demands, schools reduced their reading assignments, thus automatically reducing their command of language. Untrained in logical analysis, ill-equipped to develop and construct formal arguments about issues, unused to mining texts for deposits of factual material, the students fell back to the only position they could truly call their own: what they felt about things. When feelings and attitudes are the main references of argument, to attack any position is automatically to insult its holder, or even to assail his or her perceived “rights”; every argumentum becomes ad hominem, approaching the condition of harassment, if not quite rape. “I feel very threatened by your rejection of my views on [check one] phallocentricity/the Mother Goddess/the Treaty of Vienna/Young’s Modulus of Elasticity.” Cycle this subjectivization of discourse through two or three generations of students turning into teachers, with the sixties’ dioxins accumulating more each time, and you have the entropic background to our culture of complaint.

            Our political and economic leaders today are not elites, they are anti-elites. They are vulgar, immoral, uneducated and incompetent clowns. Think of them like the idiot kings of old, invested with a title–which today may come in the form of a PhD–but grossly lacking in mental horsepower. Perhaps no one put it better than Hannah Arendt (and forgive me skippy, for I know I am sinning again):

            For abundance and endless consumption are the ideals of the poor: they are the mirage in the desert of misery. In this sense, affluence and wretchedness are only two sides of the same coin; the bonds of necessity need not be of iron, they can be made of silk. Freedom and luxury have always been thought to be incompatible, and the modern estimate that tends to blame the insistence of the Founding Fathers on frugality and ‘simplicity of manners’ (Jefferson) upon a Puritan contempt for the delights of the world much rather testifies to an inability to understand freedom than to a freedom from prejudice. For that ‘fatal passion for sudden riches’ was never the vice of the sensuous but the dream of the poor; and it has been so prevalent in America, almost from the beginning of its colonization, because the country was, even in the eighteenth century, not only the ‘land of liberty, the seat of virtue, the asylum of the oppressed’, but also the promised land of those whose conditions hardly had prepared them for comprehending either liberty or virtue. It is still Europe’s poverty that has taken its revenge in the ravages with which American prosperity and American mass society increasingly threaten the whole political realm. The hidden wish of poor men is not ‘To each according to his needs’, but ‘To each according to his desires’. And while it is true that freedom can only come to those whose needs have been fulfilled, it is equally true that it will escape those who are bent upon living for their desires. The American dream, as the nineteenth and twentieth centuries under the impact of mass immigration came to understand it, was neither the dream of the American Revolution—the foundation of freedom—nor the dream of the French Revolution—the liberation of man; it was, unhappily, the dream of a ‘promised land’ where milk and honey flow. And the fact that the development of modern technology was so soon able to realize this dream beyond anyone’s wildest expectation quite naturally had the effect of confirming for the dreamers that they really had come to live in the best of all possible worlds.

            In conclusion, one can hardly deny that Crevecoeur was right when he predicted that ‘the man will get the better of the citizen, [that] his political maxims will vanish’, that those who in all earnestness say, ‘The happiness of my family is the only object of my wishes’, will be applauded by nearly everyone when, in the name of democracy, they vent their rage against the ‘great personages who are so far elevated above the common rank of man’ that their aspirations transcend their private happiness, or when, in the name of the ‘common man’ and some confused notion of liberalism, they denounce public virtue…as mere ambition, and those to whom they owe their freedom as ‘aristocrats’ who (as in the case of poor John Adams) they believe were possessed by a ‘colossal vanity’.
            –Hannah Arendt, On Revolution

  7. Kevin Hayden

    WHY must we avoid fresh stereotypes? I’m quite certain the rich, be they ‘deserving’ or ‘undeserving’, get their fair share of praise, toadyism and envy. I doubt they’re so delicate that they can’t handle a bit of good old-fashioned loathing or being stereotyped as something less than they actually are.

    I mean, stereotyping someone for being born with set gender, melatonin levels and nationalities is pretty lame, but if we’re talking about their deeds (and misdeeds), what’s wrong with stereotyping?

    I, for example, view athletes as real workhorses who tax their bodies to achieve success and wealth. Artists, musicians, authors, scientists and inventors are part of a creative class that gains reward for its contributions.

    Sure, some may be louts, or bad parents, or otherwise less than civil, but stereotyping them as ‘deserving’ still makes sense, for their creative contributions exist in spite of their personalities.

    Stereotyping the inheritors of wealth as undeserving, or as overpampered, spoiled jerks… now that’s not fair. But that’s an old stereotype that won’t be easily overcome, so long as some of the inheritors very publicly fit the stereotype perfectly.

    New stereotypes, though, about people whose creativity has to be bailed out by the middle class, with the end result a massive bonus for their foul-ups? What’s wrong with the stereotype that this is a new form of robber baron, deserving of scorn, bad karma, plagues of locusts and staking to anthills?

    Are they so thin-skinned that they’ll lose sleep in their gated communities and private estates and beg forgiveness from their gardeners and grocery clerks? I think many will mistake real hate for envy and laugh it off, all the way to the bank.

    Considering the one-in-a-million chance that a poor person might do harm to such a nouveau-thief, what negative can come from a nouveau-stereotype? I should think the poor person scraping by with multiple misfortunes to contend with, deserve at least the right to dream of fate’s revenge. Even if they dream that the ‘undeserving’ treasury plunderer gets accidentally castrated so at least they can’t breed.

    Everyone needs a dream to get them through the day.

    As well, knowing that such bile and scorn exists likely has an additional consequence. Those robber barons may feel compelled to add security apparatus or even bodyguards. Which means more jobs and additional economic stimulus.

    The gist of your article, I well understand, but I think the afterthought about new stereotypes can’t be defended. Such stereotypes are understandable and ultimately essential as a pressure relief valve that limits the number of actual tar-and-featherings.

    And soon enough, the state will figure out a way to tax the undeserving poor for their dearest dreams. That’ll create a fresh pot of gold for some future robber baron to grab, so such new stereotypes actually are an economic stimulus.

  8. fresno dan

    Thanks for the dissertation on deserving and undeserving “Down South” which I found interesting and illuminating.

    1. DownSouth

      fresno dan,

      I suspect that much of this art, after an episode of heaven knows how much human cruelty and suffering, will in the end meet a fate not unlike that of the art produced for and by the National Socialists. As Peter Adam explains in Art of the Third Reich:

      Germany has pushed a whole chapter of its cultural history under the carpet…

      Few people have actually seen the works: many were lost in the bombings, and during the last months of the war the National Socialists hid many of their artworks in bombproof shelters. When the Americans arrived in 1945, they discovered an immense hoard of paintings, sculptures, even rugs and antique furniture. Most of the so-called official German art was shipped to the United States, where it was locked away by the Department of Defense… The United States Government has kept about 325 of the most inflammatory works in a vault under the auspices of the army in Washington. In 1950, however, 1,659 works were sent back to Germany, and in 1986 a further 6,255.

      The returned works, too, are hidden away in a storage space belonging to the customs office in Munich. Germany has no central Ministry of Culture—each state is in charge of its own cultural affairs—so the Ministry of Finance was put in charge of this art. National Socialist art is still a great embarrassment to the German government. Only art historians and people with a “genuine professional interest” are allowed to see it. Few have made use of the opportunity, it is convenient for many people to push this art out of the way by largely ignoring it.

      So far no German museum has expressed the wish to show any of these works, although there are negotiations for the newly founded Museum of German History in Berlin to take the whole collection over. In the meantime, the paintings, still in their gilded frames, some bearing the label “Purchased by the Fuhrer,” await their future destiny. They sit on simple wooden shelves in no particular order among the remnants of carpets and furniture of the official National Socialist buildings. No art historian is in charge of them. There is a handwritten catalogue that could give some information about dates or ownership of the work, but it is carefully guarded and out of sight…

      The embarrassment about the pictures and the way they are handled is widespread. No one seems to know what to do about them. The owners of the works or families of the painters also seem not very interested in regaining access to them. Periodicals and books published during the National Socialist period that dealt with the art of the Third Reich are scarcely available; most libraries were only too eager to destroy the damaging evidence…

      Some still believe that they have evil powers which could rekindle National Socialist thought. Others fear that paintings of this kind could actually appeal once more to a large public….

      The art of the Third Reich is difficult, complex, and controversial. Whether it be in the form of fine arts, architecture, film, literature, or music, it cannot be considered in the same way as the art of other periods. It must be seen as the artistic expression of a barbaric ideology. One can only look at the art of the Third Reich through the lens of Auschwitz.

      In order to grasp the meaning of Damien Hirst’s work and the cultural values the people who buy it wish to legitimate by putting such a spectacularly high monetary value on it, consider this from the “Greed is good” article by Waldemar Januszczak:

      To understand what Hirst is doing…I suggest you go along to one of the presale viewings – daily until September 15, admission free – and search out his latest shark piece, The Kingdom. It’s a huge black case featuring an 8ft tiger shark suspended, as always, in formaldehyde. The hideously pointy mouth is wide open, as if it is going to eat you, and its evil little piggy eyes search you out with that terrifying one-directional stare sharks have.
      Tiger sharks, remember, can bite through the shell of a marine turtle. If they are feeling particularly peckish, they even eat each other.

      Once you have found the shark, imagine that it represents Sotheby’s. No, go further than that. Imagine that it represents the entire art world and the manner in which it pursues its business. See how predatory it is, how cunning, how fixated on its prey, how implacable and ruthless.

      Or this:

      The biggest and most expensive piece in the show is a life-sized bull, suspended in formaldehyde, which has been given solid-gold hooves and horns. The gold plating of its case is apparently the largest bit of gold plating ever attempted on a vitrine…

      Icons of sharks and gold-plated bulls: the message here is not too terribly subtle.

  9. carol

    Did anyone click on the link to NY Times in this post by Yves?
    It is really an astonishing, but also very revealing, read.

    Off course it contains the many, many, many fallacies, a.o. that if the very wealthy get taxed — though they still would want to contribute by giving to charities (of their choosing) — there is nothing left to give to charities (of their choosing).

    Or what about this one: ¨People who get caught up in this paranoia spend all night reading these blogs, …. Even if they’re right, there is a lot of wasted energy put into this. They need to look at the mistakes they’ve made in their life.”

    On a related note: the big picture (Barry Ritholtz) posted that the almost record GS bonuses were no big deal. He got overwhelmed by his readers´ reactions to the contrary, and most of those readers do not seem to be poor, jealous people who just made many mistakes.

    After that NYTimes read, please go to Gilian Tett (in yesterdays FT): ¨Michael Moore must leave US to find new elite¨

    and then be even more amazed about that NYTimes article.

  10. Amos Newcombe

    From R. H. Tawney in Religion and the Rise of Capitalism:

    the poor, it is well known, are of two kinds, ‘the industrious poor’, who work for their betters, and ‘the idle poor’, who work for themselves.

  11. kievite

    Willem Buiter soft versus hard budget constraints are essentially a form of dealing with principal-agent problem.

    I think taxation of financial sector should different and higher then taxation of other sectors of economy in the same way as we tax casinos at a different rate.

    I would like to see it at least on pre Reagan level

  12. craazyman

    This “people hate the rich” meme is a tawdry strawman foisted up by the NY Times to placate a portion of its advertising base.

    Really now.

    What utter nonsense. Total pathetic nonsense.

    People (in general) don’t hate people who get rich by taking risks and doing legitimate hard work making things folks need or creating things. They admire them. They emulate them. They try to learn from them.

    The NY Times serves a useful purpose for dog owners out walking the poodle. But that’s about it.

    (Except of course for Gretchen Morgenson and Floyd Norris, who are generally good, and the other article Yves linked, which is good).

    I’ll use the paper as a pooper scoop, but I’ll reserve the right to read a few articles on the web if I choose.

    Ho Ho Ho says Santa Claus handing out my money to morons.

    Cover that, Times.

    And I’m sure you can find a West Side Shrink with a funhouse mirror mind to quote about the Behaviorist Therapy that can untangle my mental knot and resolve my populist rage — with a few Jungian dreamwork sessions thrown in. Pushups and situps and a “Can Do” attitude. Ha ha ha. Dreams of Oz with Dorthy and the Strawman And a few cold beers on some yellow brick road. That and a nice massage. Ha ha ha hahahahaha. It will work for at least a day, and by the next therapy session I’ll be ready to write another check for the services. I can see a business oppportunity here. Hmmmm. It makes me wonder.

  13. Angry Saver


    The profits at all banks currently and over the past 20 years are the result of the biggest Government giveaway in history. At least $15 trillion of the approximately $53 trillion in existing credit outstanding is unsupportable by actual economic output.

    Banks paid themselves handsomely to create the $15 trillion in bogus credit, and banks are being handed trillions by the Government & Fed to support the bogus credit. The notion that Wall St. earned money is a joke.

    The $15 trillion number is supported by serveral metrics. A simple one is that MZM over the past 15 years has grown at 8.8% against a nominal GDP the has grown at less than 6%.

  14. gruntled

    If the profits are due to government subsidies, and clearly they are, then why are the GS, et al., employees entitled to bonuses? The party deserving any bonus here is the hapless and helpless taxpayer. Using the same formulas used by GS, for example, to reward themselves, these giant parasites should be taxed and those excess funds returned to the Treasury.

  15. i on the ball patriot

    Kevin Hayden says;

    “Stereotyping the inheritors of wealth as undeserving, or as overpampered, spoiled jerks… now that’s not fair. But that’s an old stereotype that won’t be easily overcome, so long as some of the inheritors very publicly fit the stereotype perfectly.”

    It is very fair, especially if that inherited wealth was a product of a rape of past generations. Aggregate generational corruption is in reality the greatest problem in scamerica today. The corruption of the past rapes, embodied in the now blatant scam ‘rule of law’ and the scam electoral process, is the greatest impediment to meaningful positive change.

    Again, the test is “deserving or undeserving”? There should be no statute of limitations on rectifying the inequities of past rape.


    Art as derivatives …

    Regarding the ‘value’ of the art of Dali and other ‘intellectual’ art beyond the grasp of the commoner. It functions in essence like similarly difficult to understand financial derivative products. The base art genre; surrealism, abstract art, pointillism, etc. always has a certain validity, but when selectively recognized, cut up, repackaged, and resold, it takes on a greater bubble financial value that requires a constant amount of inflating energy.

  16. LeeAnne

    Its not in the American character to ‘hate’ the rich although ‘rich bitch’ and other forms of resentment are not unknown. As long as Americans experienced opportunity and thought of themselves not locked into a rigid class system they were willing to forgo a certain future for an edge for getting ahead over other more socialistic systems.

    For the people who worked at dismantling rule of law for profit, traitors like Robert Rubin, Sandy Weill, George Bush, Phil Gramm, Hank Paulson, Alan Greenspan, et al, financial rapists is too polite, too long; it doesn’t work for me -SCUM does -attribution Max Kaiser. He really got it right http://shankystechblog.blogspot.com/2009/07/max-keiser-gs-are-scum.html

  17. Francois T

    For some unfathomable reason, I’m starting to love the concept of progressive taxation.

    *evil grin*

  18. Doug Terpstra

    “…this view [of bankster profiteering at public expense] should be conventional wisdom by now (well, it is among folks who understand financial services, but not in the wider world). And it should have been widely commented on when first and second quarter bank earning came out,. Instead the meme was “isn’t it wonderful those banks we thought were dead are actually making money!”

    That’s really not fair to financial illiterates like me in the “wider [fly-over] world.” We could see (all too) clearly the nastiness of the Wall Street emperors parading naked down Wall Street. But while we were retching with revulsion, it was nobel-caliber economists who were commenting on the banksters’ fine tailoring. The Nobel Committee is fast losing credibility.

    1. attempter

      Yeah, I didn’t quite follow that part either. It seems to apply more to the MSM, Washington, academia, and other groups of idiots. Maybe that’s what was meant.

      I read an article the other day, i forget where, about the uproar over the GS bonuses. It basically accused people of self-contradiction: “one moment they’re afraid the banks will collapse, the next they’re yelling that the banks are too successful!” (that’s a paraphrase).

      Leaving aside that the are other options between letting them go bust and letting them go back to their partying casino ways, though the government has refused to recognize such options, I’d say that most of the people who are enraged about the bonuses are probably the same who recognized the bailout for what it was and opposed it from the start.

      So there’s no contradiction.

      (And of course we’ve been proven right. Nor can anyone blather at us about how painful the collapse would have been for everyone if Wall St had gone down completely.
      It HAS BEEN painful, and it IS painful, for everyone EXCEPT these pigs. The bailout saved no one but THEM.)

  19. Vinny G.

    Isn’t that typical of any Fascist nation, where the government and big business have become one and the same?

    Please see my “5-easy step recipe for continued health and wellbeing”, which I posted in the “Elizabeth Warren on Bank Bonuses” thread above.

    If you are not already working on step “D”, may I politely ask, “What is wrong with you?”… :)

    Vinny G.

  20. Justicia

    That of course begs the question, “If the market is being manipulated, how and by whom?”

    How about the “Plunge Protection Team” (aka the President’s Working Group on Financial Markets). From Kevin Phillips book Bad Money:

    p. 58 — “The Working Group’s purposes, as elaborated in a 1997 Washington Post article, were to enhance ‘the integrity, efficiency, orderliness and competitiveness of financial market and [maintain] investor confidence.”

    KP notes the lack of interest in the domestic press about this government entity set up to manipulate markets and goes on to say:

    p. 59 — “The Telegraph in London ran several articles, in 1998 and 2006, eventually describing the Plunge Protection Team as a ‘shadowy body with powers to support stock indes, currency and credit futures in a crash.”

    The PPT gets my vote.

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