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The title of this post is somewhat misleading "“ designed to be provocative to get you to read what I have to say. Indeed, I am going to defend Goldman Sach's right to pay what it likes to its employees. But, I am also going to defend your right to be outraged and to look for redress.
Socialism?
Let's start this off with another provocative statement which encapsulates my thinking on the issue:
The teabaggers who showed up in the summer at Town Hall meetings to shout down politicians and scream "?socialism' at anyone who would listen because Barack Obama was going to pull the plug on granny need to redirect their anger. By socialism I take it they mean central planning in a capitalist society. If they want to see socialism in action, look no further than banking.
Yes, that's how I want to lead into this issue.
Let's state the obvious: banking is a legally sanctioned cartel. In the US, the federal government by law has nominal control over the entire monetary and lending apparatus- both the printing press and interest rates – via the Treasury and the Federal Reserve respectively. The state and federal government also control who gets to be a bank by accepting and rejecting applications for bank charters and seizing banks which fail to meet their obligations as safe and sound lending institutions.
Let's call this what it is: socialism. One can argue whether this is the right way to run a banking system. But let's put that (ideological) argument aside and focus on the specific issue of bonuses within that system "“ and whether the government's controlling them is "?socialism' and whether we should accept that control.
Should the government Get to dictate who gets how much in the financial sector?
Goldman's bonuses?
When Goldman Sachs reported record profits for the third quarter of this year, they also told us they were setting aside a record amount of money to pay bonuses. Goldman's record bonuses were not the only signs of champagne and caviar on Wall Street: JPMorgan Chase reported preparations for huge payouts as well. Even Citi and Bank of America are poised to pay billions. Over in the UK, the same is also true in the City of London, one reason London residential property prices are rising. Bankers are poised to make tens of billions.
Meanwhile, in the real world, the unemployment rate is still rising, we are seeing record numbers of foreclosures, and households are struggling with unprecedented levels of debt. And much of this has to do with the the inability or unwillingness to lend by those same bankers, many of whom are making millions individually. Clearly, there is something wrong with this picture.
The Obama Administration, which helped orchestrate a bailout of the banking system as the first priority when it came into office, has been asleep at the wheel quite frankly. It should have been patently obvious to them that bailing out the bankers while allowing them to pay themselves billions in the middle of a depression was going to create a backlash, ruin their credibility as agents of change and sow the seeds of a Democratic Party nightmare in 2010.
Obama has wasted political capital bailing out the financial sector. This is why people were yelling socialism at town meetings when Obama wanted to pass healthcare reform "“ something you should see as misdirected anger which the health insurance lobby is all too willing to exploit. What's funny is that the bailouts are not just killing Obama's street cred; they are also poisoning the chalice on Wall Street. Big bank CEOs – to a name – spited the man by not showing up at his big financial reform speech. And bankers are not "?happy' with Obama for having received their bailouts as political contributions are down.
At least they are beginning to realize their mistake. They are now admitting publicly that even Goldman Sachs would not exist except for the largesse of government. Witness these comments from Larry Summers as reported by Paul Krugman on Monday.
There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.
But, what are you going to do about it? Are you going to try to cap bonuses? How about a windfall tax as has been proposed in Britain. This is where I say "keep your hands off Goldman's bonuses."
Capping pay
Is capping pay a legitimate way to run an industry? Paul Krugman thinks so:
I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: "Why is it," he asked, "that we're going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?"
That's an astonishing remark "” and not just because the National Football League does, in fact, have pay caps. Tech firms don't crash the whole world's operating system when they go bankrupt; quarterbacks who make too many risky passes don't have to be rescued with hundred-billion-dollar bailouts. Banking is a special case "” and the president is surely smart enough to know that.
All I can think is that this was another example of something we've seen before: Mr. Obama's visceral reluctance to engage in anything that resembles populist rhetoric. And that's something he needs to get over.
It's not just that taking a populist stance on bankers' pay is good politics "” although it is: the administration has suffered more than it seems to realize from the perception that it's giving taxpayers' hard-earned money away to Wall Street, and it should welcome the chance to portray the G.O.P. as the party of obscene bonuses.
Equally important, in this case populism is good economics.
No, it's bad economics.
Here's an idea:
You, down the street, packing and hauling those boxes –everyone else in the city is making $27,000 for packing and hauling. You’re making $43,000. I don't care if your company is more profitable — that's too much. We’ll leave you a little upside but not THAT MUCH upside. Your pay is officially capped at $37,000.
Is that what you want?
You say:
Edward, it’s different with bankers. They’re just greedy. They don’t need the money for basic necessities like food, rent and utilities.
Neither do Madonna, Will Smith, or Tiger Woods. Should we cap their pay too?
You say:
Well, no. They earned the money. The bankers are greedy. Greed is not good. It is excess and it needs to be stopped. it's just not fair.
Now, you are on to something.
The issue is the bailouts
The problem here is fairness. What you have here is a case where bankers have received huge wads of taxpayers' money to save them to perform their central roles in supporting economic growth as lenders and depositary institutions.
The populist take: The banks took the bailout money and, instead of lending, they went out, leveraged up, and put their casino money in proprietary trading, mergers and acquisition and broker dealer activities. Then they paid themselves record "“ not just large, but record "“ bonuses with our money. It is theft, plain and simple.
I hope I have the sentiment about right. I share those sentiments.
The question again is: what should we do about it? The position that government can just arbitrarily reach into some private enterprise's internal affairs and make individual decisions on its behalf is indefensible. That is not how capitalism should work and I am not buying into that argument.
What should have been done when Obama came to office in the first place is bankrupt organizations should have been seized and broken up, sold, recapitalized or liquidated. That is what was discussed in February as nationalization, but what I call pre-privatization. If insolvent big banks had been seized during the panic, all contractual obligations would have been rendered null and void. There would have been no $100 million payout for Andrew Hall, no billions in bonuses, nothing. The slate would be wiped clean and the government as temporary owner (and a bankruptcy judge) could briefly decide who gets what before the assets were disposed of. And of course, all of the other problems like overcapacity, lower lending to protect weak capital bases, excessive risk taking would have disappeared as well.
But, that never happened because the Obama Administration and Congress are captured. Rahm Emanuel is famously rumored to have said "?never waste a crisis.' Well, guess what? Your administration just wasted a crisis. As for capture, call it kleptocracy. Call it corporate communism. Call it crony capitalism. Call it whatever you want "“ that ship has sailed. We never took over the banks. We never demanded a say on pay in exchange for government backstops. We gave the banks everything they wanted with no strings attached. Oh, there was the stress tests. But the stress tests were a sham right from the word go. Irrespective, the government has no legal authority to reach inside Goldman Sachs and start dictating pay any more than it has authority to do the same at your company.
What the government has the power to do is four things:
What can you do?
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