FAILURE + BONUS = WALL ST. CAPITALISM

It's this kind of talk that tells me the people on Wall Street are not only morally bankrupt, but simply clueless:

“I think President Obama painted everyone with a broad stroke,” said Brian McCaffrey, 55, a Wall Street lawyer who was on his way to see a client. “The way we pay our taxes is bonuses. The only way that we’ll get any of our bailout money back is from taxes on bonuses. I think bonuses should be looked at on a case by case basis, or you turn into a socialist.”

For now, let's ignore the failed logic (you can only pay taxes if you get bonuses) and the failed math (taxes paid on $14.5 billion in bonuses will pay for $850 billion in bailout money?). To suggest that we run the risk of becoming "socialists" if we take away bonuses for executives who ran their companies into the ground is simply mind-numbing.

Here's another clueless Wall Street welfare queen commenting on Barack Obama's suggestion that bonuses granted to executives in failing companies was "shameful":

“It’s a very slippery slope to go down,” said another insurance broker as he waited to be seated for lunch at Cipriani Downtown. “A blanket statement like that borders on ... socialism.”

No wonder these guys ran our economy into the ground. They have no sense or understanding that capitalism is about rewarding accomplishment and success. You get rewarded for success, not failure.

But here's my favorite Wall Street quote of the day:

“On Main Street, ‘bonus’ sounds like a gift ... But it’s part of the compensation structure of Wall Street. Say I’m a banker and I created $30 million. I should get a part of that.”

Here's my question: What happens when wealth disappears because the investment instruments you created collapse? Who's responsible for the trillions lost in the market over the past 6 months?

- Mark

WAGES IN AMERICA SINCE REAGAN ...

According to Bloomberg.com the average income of America's richest 400 households doubled to $263.3 million during the first 6 years of the Bush administration.

Now, I could start with a long presentation on what has happened over the past 8 years under George W. Bush, and even go all the way back to President Reagan to illustrate what has happened since the republican-led "tax-cuts-for-the-rich-let's-make-war-on-labor" policies, but the numbers don't quite paint the right picture.

But graphs do.

Below are three graphs I draw from my forthcoming book, The Myth of the Free Market: The Role of the State in a Capitalist Economy. First up are the wage gains between the richest and poorest Americans between 1947 and 1979. While there are small differences, on average everyone saw their wages go up at relatively equal rates.

There is not much dispute as to why wage gains were relatively equal across all income levels between 1947 and 1949: FDR's New Deal combined with Truman's Square Deal, and the fact that Eisenhower didn't meddle with their economic handiwork, helped keep all segments of America happy.

Things would change, however, when Ronald Reagan came to office. Here are how wage gains were distributed between 1979 and 2004 . . .

As you can see, the wage gains by the richest Americans skyrocketed after Ronald Reagan entered the White House, while America's middle class and its working poor saw their wage gains effectively collapse. You can imagine what happened when George W. Bush came to office.

Things got so bad that the computer I was using to create these graphs couldn't do percentages. It's probably just as well. The numbers are simply ridiculous . . .

What you're seeing here are income gains of $1.9 million under President Bush for America's richest, while the bottom 90% effectively saw their income gains stop and even go backwards (especially for America's working poor).

I'll be discussing this on tomorrow's program.

- Mark

TAX BONUSES AND/OR USE RICO STATUTE

With more than $18.4 billion in bonuses paid out to executives of failed financial institutions, and with President Obama calling these bonuses "shameful," the NY Times has an article discussing the merits of getting some of this money back. Unfortunately, while the article discusses taxing bonuses retroactively, it ends meekly by saying that this tactic "would hurt New York and other financial centers."

Incredible.

My comment at this point is "Who Cares?" Definitely not those who have seen their nest eggs collapse, or who have lost their homes.

We need to keep in mind that these guys knew what they were doing. Even the ones who weren't malicious understood what was going on. If they didn't, they don't deserve bonuses and, more to the point, should be looking for new a new line of work.

To argue that clawing back at bonuses with retroactive taxes would be bad for business is akin to suggesting that we shouldn't confiscate the ill-gotten goods of drug traffickers because "finders keepers." Where criminal activity and criminal negligence are involved, possession is not 9/10ths of the law.

Some might be inclined to argue that nothing illegal was done by executives who secured bonuses for helping run their companies into the ground. Think again.

As one of my acquaintances from the investment world pointed out, if we look at RICO statutes (1970, Racketeer Influenced & Corrupt Organizations Act; inspired by the Mob) we could pursue a criminal conspiracy to defraud. What's key here is conspiratorial "intent." Only in this case, because finance and corporate law is so opaque, I say let's circumvent the courts. They're overburdened as it is.

If we can grant retroactive tax breaks for a specific industry (and we have) we can also pursue, for lack of a better term, a Financial Industry "Bonus" Tax after the fact.

- Mark

A NATION OF MORONS

A nation of morons . . . This is what Republicans think of America.

The House Republican’s party-line “thumbs down” to President Obama’s economic stimulus program, and their rejection of President Obama’s pre-vote olive branch, represents one thing and one thing only: their first step toward regaining power

According to Republicans, if they leave President Obama and the Democrats to deal with President Bush’s economic mess they believe their rejection of the stimulus package will allow them to cast blame and gain some seats in 2010, with the goal of regaining power in 2012.

Unfortunately, this line of thinking is not so far-fetched.

Republicans understand very well that the economic catastrophe facing this country is real. Record deficits, stagnant wages, record personal debt, and an exploding national debt will not disappear any time soon. Still, they don’t want to help President Obama because they also understand that if President Obama’s vision (making government work) and policy initiatives (directed toward social justice) help Americans see light at the end of the tunnel he will be rewarded. So will the Democratic Party.

Simply put, republicans see FDR’s spirit in Barack Obama’s initiatives, and it scares the hell out of them. President Obama has become a political Ghost Whisperer of sorts.

So the Republican strategy today is to put some distance between President Bush’s record, and their blind support for his programs. The believe America will forget that they handed President Bush the matches he used to light our national house on fire. Worse, they think this will happen if they say "No" to everything President Obama proposes and wait for the underlying economic tsunami that is poised to wash up on our political shores (the numbers surrounding bank positions on derivatives are truly scary). They are banking on additional meltdowns and bailout fatigue. Like political vultures they are waiting for system rot and the smell of death. Hence the non-cooperation.

Obstructionism and a lack of cooperation worked for Republicans at the national level in 1994 (led by Newt Gingrich), and in 2003 with California Governor Gray Davis (led, in part, by current minority Deputy Whip Kevin McCarthy). The goal is not to govern, but to obtain power. It makes no difference to Republicans that the ideas they offer today – more tax cuts and deregulation – are the exact same ideas that ran this country into the ground under President Bush.

You’re probably scratching your head, and asking yourself, “Are they really thinking like this? ... Do they really think America will forget?" The short answer to these questions is YES.

Like I said, Republicans think America is inhabited by a nation of morons.

- Mark

WALL ST. BONUS RECIPIENTS SAY BONUSES TOO SMALL

When a national chain went out of business a few years back the service contract that I had purchased for my car went down the drain. My fully paid contract, in effect, was voided. When I asked about having my service contract transferred to another shop I was told it wasn't going to happen. Tough luck for me.

Recently, auto workers and airline employees were asked to renegotiate their contracts because the times "demand" concessions and sacrifice from everyone. They are expected to take it on the chin, and move on. Tough luck for them.

When it comes to our nation's financial sector, however, there's another set of expectations. Executives who were either incompetent or criminally negligent (or is that "criminally stupid"?) don't have to live by the same moral code that you and I are expected to stoically absorb through rough times. As reported on Keith Olbermann's Countdown, AIG executives who sold the empty insurance products that helped to bring our national economy to its knees are getting $450 million in bonuses for selling these destructive products. Their contract says they have to get paid.

But wait. It gets worse. If you recall, AIG is the same firm that blew through $85 billion of bailout money and then had the gall to pay its executives at least $450 million in "retention" bonuses back in November of 2008 - after saying they wouldn't pay bonuses. Nice.

Incredibly, our Bonuses for Incompetent Financial Executives story doesn't end here. The NY Times is reporting:

A poll of 900 financial industry employees released on Wednesday by eFinancialCareers.com, a job search Web site, found that while nearly eight out of 10 got bonuses, 46 percent thought they deserved more.

Nearly one-half of bonus recipients believe they deserve more bonus money? You know, I'm not convinced about the eternal damnation story-line. But if there is a fire & brimstone place called Hell, these guys should have reservations (after Hitler and his goons gets in, of course).

Is there even a word in the human vocabulary adequate enough to describe the kind of behavior we're witnessing? Sheesh.

Here's my suggestion: If Congress can grant individual immunities, personal exemptions and specific subsidies to individual market players why can't we get a specific wage and bonus tax for these payouts? Just a thought.

- Mark

OBAMA COOL

My colleague calls it "Obama Cool." Whatever it is, this SNL piece captures it ...



- Mark

HOW WE GOT HERE . . .

I think by now most of us realize that the market players involved in creating our financial mess had a stake in the game, and weren't about to blow the whistle on their financial Pot of Gold. We also understand that government agencies were being hacked and bullied into deregulation and lax oversight by a market mentality that had overtaken government bureaucracies. But have you ever wondered why so many experts in the field of economics didn't see the financial train wreck coming? Wonder no more.

The following is from University of Oregon economist Marc Thoma's blog, the Economist's View:

. . . it's becoming a lot easier to understand how financial economists missed the developing bubble and the effect it would have on the macroeconomy. We specialize mightily in academic economics, people will work on very narrow questions for their entire careers and become world class experts on that question, but they tend to forget what they learned in other areas over time, and they can't possibly keep up with developments outside their areas of specialization. So we rely and depend upon the expertise of others to inform us about areas in which we don't normally work.

One thing I've learned from the current episode is not to automatically trust that the most well-known economists in the field have done due diligence before speaking out on an issue, even when that issue is of great public importance, or even to trust that they've thought very hard about the problems they are speaking to. I used to think that, for the most part, the name brands in the field would live up to their reputations, that they would think hard about problems before speaking out in public, that they would provide clarity and insight, but they haven't.

In fact, in many cases they have undermined their reputations and confused the issues. People have been deferential in the past, myself included, and these people have been given authority in the public discourse - even when they are demonstrably wrong their arguments show up in the press as a "he said, she said" presentation. But, unfortunately for the economics profession and for the public generally, the so called best and brightest among us have not lived up to the responsibilities that come with the prominent positions that they hold.

I agree. The experts in academia - and not just economists - became deferential to the experts and politicos in the public square, expecting others to pick up the slack (the Fourth Estate's to blame as well, but that's another post). There are reasons why this happened. It begins with living in the "Dark Ages" of macroeconomics (read Thoma's blog), but deference is the key. My next post will address this point.

And it nails Milton Friedman to the wall.

- Mark

WHY REPUBLICANS FEAR OBAMA

The republicans are running scared because they know that their bankrupt ideas, plus their incompetent governance, broke the country. They're now telling the world that terrorists will be let loose in America if we close Gitmo or, worse, that "terrorist" detainees will be applying for citizenship - in your backyard no less. Spooky stuff.

Seriously, do these guys ever stop being afraid? Apparently not.

On the economic front, republicans are crowing like Chicken Little, telling America that Barack Obama's economic stimulus program is going to break the bank because it's so expensive. The problem is they've gotten religion on fiscal responsibility a bit late. They seem to have forgotten that they stood by and handed Team Bush the fiscal flamethrowers they used to burn through $5 trillion dollars. Oh, and they said nothing as President Bush prepared to leave town, handing Barack Obama trillion dollar deficits as far as the eye can see, and a collapsing economy.

So what does Barack Obama do during his first week in office? He spent part of this morning talking with congressional republicans, trying to explain the mechanics behind his $825 billion stimulus package. He's looking for bi-partisan support. I hope it works. But it probably won't. Here's why.

Apart from having to acknowledge that their ideas helped run this country into the ground, republicans are deathly afraid that Barack Obama will pull an FDR and lay the ground work for recovery. This is an interesting conundrum for the republicans because while they like spreading lies about FDR they also know that much of the prosperity and economic stability that we experienced in the post-war era was made possible by FDR's New Deal.

For all their talk about Country First, republicans see Barack's success as a threat to their political viability. The well being of the country is not their concern. It's really that simple.

- Mark

SOCIALIZING THE LOSSES vs. PARTIAL NATIONALIZATION . . .

The NY Times has an excellent, and brief, six-step synopsis of what went wrong in our economy. In essence it points to a lax regulatory environment (with derivatives, corporate leverage levels, and subprime lending), failed policy responses (to foreclosures and Wall Street bailouts), and the colossal mismanagement of the TARP bailout money. Much of the article is old hat now, but for those of you having trouble keeping score at home, it's a quick score sheet that's not too technical (Full Disclosure: I also like it because it mirrors what I say in the last three chapters of my book).

In another NY Times article it's made clear that we're not going to get out of this mess until we clean up the "insurance" gambles (credit default swaps) that were bought and sold between financial institutions.

In this market we had market players buying and selling insurance for products, like debt contracts, that they couldn't pay off if the product they were insuring went south. What these guys did would be akin to you selling outrageously cheap car insurance, knowing full well that you wouldn't be able to pay out if people started wrecking their cars. Worse, apart from never planning to pay out on claims, the only thing you were really after was the monthly premiums. Bailing out this group of market players not only rewards bad behavior but will cost trillions of dollars.

Or we could do the smart thing and force losses on those who were gambling on America's economy going south, and didn't really care what they bought as long as they had "insurance." Think about it. If you purchased a bad insurance policy for your car the government wouldn't say, "that's alright, we'll pick up the tab for your wrecked car." We need to force losses on those who perpetuated an irresponsible system, gambling that the government would eventually cover their bets (by enforcing contracts, or by bailing out the industry). Read the article because it has several good recommendations.

What does this all mean? It means we're in a real mess. We've already encumbered at least $2.9 trillion in new debt but have little to show for it. Socializing the losses by having the American taxpayer pick up the pieces for stupid behavior is not good policy.

This is one of the reasons why I believe that partial nationalization of America's failing financial institutions is the best option available. Why? Because we get some control over bank actions (which we have to bailout anyways), and it will put the fear of God into an industry that has yet to learn any lessons from this mess (as they continue to pay out billions in bonuses, refuse to discuss what they're doing with TARP money, etc.).

The NY Times discusses the nationalization issue here.

- Mark

THIS IS WHAT WE SHOULD DO . . .

Billionaire financier, and all-around smart guy, George Soros has an excellent article discussing the choices that face us on the economic front in Thursday's Financial Times. In the article he writes that we have two choices:

1. SOCIALIZE THE LOSSES: Leave the banks in private hands, and buy up their toxic debt (at least $1 Trillion). These toxic instruments would then be put into a monster "aggregator bank." This is what the USSR (United States of Socialist Republicans) wants.

2. PARTIAL NATIONALIZATION: Partially nationalize the banks by purchasing a controlling interest in their stock at current prices, and then inject them with taxpayer money (which would require more than $1 Trillion). Democrats fear this route because they don't to be labeled socialists.

The first option represents a play on what Hank Paulson and the Bush administration did - simply bailout and hand over money to private market players who made incredibly stupid decisions. The only real pain is suffered by the American tax payer. The stupid and greedy win.

The second option offers a clean break with the Bush administration, but would entail imposing significant lossses on shareholders.

I like the second option for two reasons.

First, partial nationalization would allow banks to begin renegotiating with home owners who are either up-side down on their mortgages, or facing a rate adjustment over the next three years. The government will cover the banks losses. We're going to have to cover these losses any ways, so we might as well as do it the right way and get some money into the pockets of Main Street.

The second reason I like partial nationalization is that it would send a signal to shareholders around the world that they need to keep an eye on company executives and watch their investments. They can't continue to privatize the profits and socialize the losses. Simply put, the shareholders and stupid investors who allowed this mess to develop because they didn't want to stop the constantly "inflating profits" gravy train don't deserve a taxpayer bailout.

So, if the choice is between "socializing the losses" (Choice #1) and partial nationalization (Choice #2) I say we do it right and teach "stupid is as stupid does" a lesson.

I'll have more to say on this on today's program.

- Mark