Wallace C. Turbeville of New Deal 2.0 wrote one of the most slanted and misleading columns I have ever read, “Which is the Bigger Threat: Terrorism or Wall Street Bonuses?” Before I start dissecting this piece of drivel, why not first give it a read?
The current system of trader compensation will continue to decay the heart of Wall Street.
Which is a greater threat to the nation — terrorism or the relentless decline of middle income families? Unless we abandon our core values out of unwarranted fear, terror cannot fundamentally change our way of life. The number of people affected by growing income disparity is vast. When I was a student, income disparity was indicative of an underdeveloped and unstable society.
The government appropriately devotes enormous resources to protect our lives and property from terrorism. It is unthinkable that a leader would display any weakness opposing this threat. Politicians have stiff backbones when it comes to terrorism.
In contrast, the government is timid and half-hearted in its approach to the system which perversely rewards a few Wall Street traders with billions of dollars of bonuses, yet allows the foundation to decay.
Kenneth Feinberg issued his report identifying outrageous Wall Street compensation of executives despite their role in the financial disaster and bail out. He proposed that the banks voluntarily adopt “brake provisions” that permit boards of directors to nullify bonuses in the event of a new financial crisis.
He might have more success asking the lions of the Serengeti to give the wildebeests a sporting chance of making an escape.
Over the last fifteen years, the financial sector’s percentage of GDP has increased dramatically. At the same time, the median family income stagnated and then declined. I do not believe that this is a coincidence.
The large banks have changed. They slice and dice the constituent elements of a stagnant economy, squeezing value out in ever more sophisticated ways. Wall Street has turned away from its roll as the financial backer of industry and commerce. In the short term, it is more profitable for them to use their capital for trading. Newfangled software and MIT “quants” allow the traders to “rip the faces off” of corporate counterparties and investors which were once trusted clients.
These young traders are simply doing what America has told them to do. They are allowed to earn obscene amounts of money using the advantageous information, technology and capital of their employers. Making money from less powerful counterparties is like shooting fish in a barrel. The banks make so much money that they have no problem shoveling it out to the traders.
The alternative careers for these talented young people offer upside which is modest by comparison. Besides, the trading world, in which the law of the jungle prevails, appeals to youthful aggressiveness. Michael Lewis expected that college students would be appalled by the amoral environment he described in “Liar’s Poker.” Instead, the overwhelming response he received from students was a desire to get in on the action. The draining of talented and energetic young professionals away from corporate America where they could help create jobs by the millions may be as damaging as the new allocation of wealth.
The government’s flaccid approach to Wall Street compensation, embodied in the Feinberg report, is appalling. Geithner and Bernake appear intimidated by Wall Street, yet intent on its approval. Why do they guilelessly buy into the notion that giant, multi-purpose banks dominated by trading are essential to America’s competitiveness in the world? Smaller, less risky institutions aligned with economic growth would seem to be a better idea for the vast majority of Americans.
Greenspan and his progeny, including Geithner and Bernake, are enthralled by financial innovation. Innovation, by itself, can be good or bad. Innovation does not fall into the “good” category if it corrupts the home mortgage market, siphons off business productivity and the jobs and wages of employees and unfairly enriches the few at the expense of the many. It is good if it creates jobs and enriches the public as a whole.
Trader compensation is at the heart of the problem. It encourages behavior that is inconsistent with Wall Street’s most important function: raising capital for industry and commerce. The banks and the government are afraid that the traders will desert the banks and move to hedge funds if their compensation is reduced. If they do jump ship, it is all the better for America. At least hedge funds can blow themselves up without crippling the US economy in the process.
Former traders now run most of the financial sector. They believe that the traders somehow deserve compensation at the prevailing levels. The system will not change unless it is forced to do so. The restrictions in the financial reform legislation only inhibit specific abuses. The banks will concoct new ways to trade risk. It is the only way to maintain their unconscionable profits (that is, until the next bubble bursts and we are in an even worse predicament). The only way to really change the system is to reduce short term incentives, that is to say limit bonuses. The government needs the kind of resolve it uses when fighting terrorism. After all, the stakes are actually higher.
Done reading? After reading this article, I left this response in the comment section…
This is absolutely the dumbest thing I have ever read. Excuse me but if I lose a small fortune in stocks or if my company goes out of business due to an extended recession, I can still rebuild and get back on my feet. Now, if an Islamic fundamentalists shouts “Allahu Akbar” then blows me and everyone around me to Heaven, there is nothing I can do because I am DEAD!
Economies rise and economies fall, and they do this constantly from boom to bust and back again. Americans have pulled themselves out of a slew of deep recessions and one Great Depression, and there is very little Wall Street can do to bring about permanent damage. Terrorists, however, can end lives, destroy families, cause untold misery which can’t be fixed with a loan reevaluation or government handout.
It is mind-boggling to see what you and your ilk worry about at night… Pathetic…
To which Mr. Turbeville responded…
First, the policy would be a franchise tax on financial institutions based on excessive bonuses justified by incentives to take on imprudent risks.
I am sorry that Northern Lights didn’t get the point. An economy that spirals down because of declining productivity and disparity of income is an existential threat. A deep, deflationary decline of the economy could threaten our fundamental political philosophy. In the extreme, it is even a national security threat which is more serious than terrorism by far. You maybe killed by a terrorist or a drunk driver and both are bad. But many more lives are at risk if the economy is fundamentally and permanently damaged.
Northern Lights? What an “original” way to insult me. If he can’t even get my tag right, I can’t be of importance or so says the man who is working for the dubious New Deal 2.0. Anyways…
To start with, let’s take a look at the main focus of this article. It is easy to see that the chief concern of Turbeville is “income disparity”, a “problem” which affects a growing number of people, as the article itself says. For those not familiar with the term, it is one used to describe inequities in salary between socio-economic groups within society, like the difference in pay between the upper, middle and lower classes. In short, Turbeville is worried about the fact that the wealthiest attain more wealth while the poorest lose it, or “the rich get richer while the poor get poorer”. I don’t disagree with this at all, especially during a recession, as those most affected by an economic slowdown are the lowest income earners, but what is the point in pointing this out? Turbeville believes that it is because the “rich are getting richer” that the “poor are getting poorer”, more specifically, that Wall Street bonuses are hurting lower income earners, as he pointed out in the article…
…Over the last fifteen years, the financial sector’s percentage of GDP has increased dramatically. At the same time, the median family income stagnated and then declined. I do not believe that this is a coincidence…
This statement is downright asinine. The only purpose for the first point is to somehow suggest that the financial sector’s growth as a percentage of GDP must be sinister. In the last fifteen years, we have seen the emergence of the People’s Republic of China as an major economic power, as well a the Republic of India, both needing substantial foreign investment to maintain current levels of growth, much of which comes from Western investors. Businesses both here and abroad are not only starting up, but expanding, and with more and more needing loans, one would expect the financial sector to grow dramatically. For the first point, one might as well say “the road is slippery when wet” as all this does is point out the obvious that, over time, the financial sector will overtake less productive sectors in terms of percentage of GDP.
As for the second point on median family income, I would definitely like to see the numbers supporting that. As the U.S. Census bureau indicates in Table F-6, in terms of current dollars, median and mean household income has steadily increased over the last fifteen years, dipping in the final year of the census due to the financial crisis. In terms of CRI-U-RS adjusted dollars, one does see a decline in both the median and mean family income, but not for the last fifteen years. The decline starts in 2001 and stays stagnant till about 2007 for the mean and 2008 for the median, but this is far from the long trend Turbeville would have his readers believe. On that point, Wallace also fails to prove that this is because of Wall Street’s “evil ways” and not other factors. You would have to be an idiot to think that the IT collapse, the September 11th attacks, the Afghanistan War, the Iraq War, Hurricane Katrina, etc would have less of an effect than Wall Street bonuses on family incomes. The only possible way one could believe it would be if the financial sector was somehow to blame for all these events, and one would have to be delusional to accept that.
As for a there being a relationship between Wall Street earnings and family incomes, why not look at what Turbeville provides as evidence. For the next few paragraphs, Wallace demonizes those working in the financial sector for their use of “newfangled software” and “MIT ‘quants’ to “rip the faces off” once trusted clients (language purposely used to elicit a negative emotional response). He even cites Michael Lewis’ Liar’s Poker to paint those in the financial sector not simply amoral, but immoral, a collection of dishonest and greedy people who are siphoning talented youths away from the corporate sector where these individuals could create millions of jobs. So how does this support his belief that there is a relationship between Wall Street earnings and family income? It doesn’t. Turbeville’s evidence is that he believes because those in the financial sector are such dishonest and greedy people, they must be making their profits at the expense of the average American. He provides no proof, just speculation, and this is really where his argument falls apart.
Without any solid evidence to support this claim, like factual data to show a correlation, Turbeville’s argument hinges on the belief that the financial sector’s practices are negatively affecting productivity in America in some immeasurable way. This is the second point raised by Wallace in response to my comment, “declining productivity”. So how could the financial sector be damaging other sectors of the economy? According to Turbeville, it is because the incentives provided by Wall Street is “draining of talented and energetic young professionals away from corporate America where they could help create jobs by the millions”. Where do you start to address such nonsense? The assumption here is that these “talented and energetic young professionals” that do end up in the financial sector are in no way different than those who are in other sectors of the economy, an easily exchangeable resource which has been diverted to Wall Street because of its immoral practices. If someone has spent the time and money to prepare for a job in the financial sector, they can’t simply be moved to another sector of the economy for the “good of the country”. What does Wallace want the government to do, dictate where certain people must work and how much they are allowed to be paid? People prepare themselves for the jobs they want, be it a position in the corporate, financial or even agricultural sector, a point Turbeville has purposely not pointed out for the sake of his argument.
There are two points that need to be addressed here. The first is this belief that the financial sector should not be allowed to have these “talented and energetic young professionals”. With all the business being done by the financial sector, both here and abroad, why shouldn’t they have the most competent individuals? Wouldn’t their education and experience allow them to maximize profits while limiting risk? None of this makes the least bit of sense since, for the financial sector to have expanded, thousands, if not millions of jobs would have to have been created. Why has this job creation not been mentioned in Turbeville’s article? Why does he deny this point? Simply because it goes to further undermine his ridiculous argument.
The second point is that for far too long the corporate sector has been made unappealing by hostile government policy which has stifled development through harsh regulations and excessive taxation. Is it any wonder why so many businesses have moved production abroad? As Mort Zuckerman identified a number of examples in his recent column for US News & World Report, it is because of such policies that the Obama administration has created an “economic katrina”, a period of double digit unemployment rivaled only by the Great Depression of the last century. Zukerman even points to President Barack Obama’s recent speech, which was a “gratuitous and overstated demonization” of the business community, as proof of this hostility towards the corporate sector in Washington. It is these government policies, which the corporate sector does not trust, that are hurting job creation. This is far more damaging than Wall Street bonuses, especially since Turbeville has failed to prove that they are even a threat, let alone a threat as dangerous as a terrorist attack.
So what do we make of all this? There are two critical points which must be discussed. The first point is that we don’t actually see any real comparison between terrorism and Wall Street practices. The purpose of drawing such a comparison is to “fear monger”, to suggest that those in the financial sector are enemies which the government must combat. Why not compare the effects of Wall Street practices to the September 11th attacks or the assassination of Archduke Franz Ferdinand of Austria by Gavrilo Princip, a member of the Black Hand, a Serbian terrorist group? The reason you don’t see a comparison is because it would reveal just how idiotic such a comparison is. As for this constant reference to the recent financial crisis, as Zuckerman himself points out is that laying all the blame on Wall Street for this collapse “ignores the role of Congress in many areas, but most glaringly in forcing Fannie Mae, Freddie Mac, and the Federal Housing Administration to back loans to people who could not afford them.” Once again, another purposeful omission which undermines Wallace’ nonsensical argument.
The second point is Turbeville’s advocacy for more government control. This nonsense reminds me of the Phil Donahue Milton Friedman interview…
By advocating increased government regulation of the financial sector to combat of this perceived immoral behaviour, Turbeville is saying that political self-interests are nobler than economic self-interests. Is there a need for new regulation? Obviously something has to be done, but how can anyone trust government regulators, which were as much, if not more responsible for the financial crisis? They can’t, not when the recently passed financial regulation bill contains ethnic and gender quotas. In this, Turbeville is hoping that Americans trust Washington, more than they trust Wall Street. Matter of fact, to believe anything Wallace has said about the financial sector, you would have to ignore the political corruption that is running rampant in Washington.
In conclusion, are Wall Street bonuses more dangerous than terrorist attacks? As I stated previously, Turbeville fails to even compare the two, let alone provide any evidence to prove that such incentives are in any way dangerous. The entire article is nonsensical, especially at the end where Wallace demands the government treat Wall Street like they treat terrorists. He would have us forget the September 11th attacks, and all other attempts since then, for the sake of punishing the financial sector for the perceived “crimes” they have “committed”. The reality is that Americans are still terrified of future terrorist attacks because they know just how dangerous it truly is, and if you think otherwise, think again…
People have nightmares because of terrorist attacks Turbeville. No one runs terrified for their life because of Wall Street bonuses… Pathetic…