I‘m not much of a fan of Saturday Night Live anymore. The overly partisan commentary was bad enough, but when Will Ferrell left, there wasn’t much reason to stick around anymore. Despite all that, however, I think Seth Meyers pretty much nailed it on the Michael Phelps pot smoking non-story:
Many progressives thought that Pres. Obama had abandoned them after the election, but I’ll bet they’re singing a different tune today:
President Barack Obama on Wednesday imposed a $500,000 cap on senior executive pay for the most distressed financial institutions receiving taxpayer bailout money and promised new steps to end a system of “executives being rewarded for failure.”
The limit would apply to top-paid executives at the most distressed financial institutions that are negotiating bailout agreements with the federal government.It also would apply to other banks that receive aid, but they could get around the limits by publicizing to shareholders plans to exceed the salary cap.
The “most distressed financial institutions” will not include those which have already received TARP funds, such as AIG and Citigroup. However, those firms are already subject to caps on executive pay under the statute authorizing the bailout last Fall. And because these companies have all come to the government “with hat in hand,” in Obama’s words, not too many people outside of Wall Street are upset. Yet, Obama does not seem content to stop with these “distressed” companies:
The administration also will propose long-term compensation restrictions even for companies that don’t receive government assistance, Obama said.
Those proposals include:
• Requiring top executives at financial institutions to hold stock for several years before they can cash out.
• Requiring nonbinding “say on pay” resolutions — that is, giving shareholders more say on executive compensation.
• A Treasury-sponsored conference on a long-term overhaul of executive compensation.
This is exactly the sort of creeping socialism that many of us were worried about with Obama’s election. Mind you, McCain would not have been much better, but this sort of heavy handed government interventionism would not have been proposed by his administration, much less tolerated by most Republicans in Congress.
Obama’s proposals are somewhat tolerable with respect to the bailed out companies since they are being funded with tax payer dollars. If these companies are going take the money, then they should have to abide by whatever rules are attached to the funding no matter how onerous. But trying to impose such draconian restrictions on companies that are not being bailed out is nothing more than a direct assault on freedom.
Even if you think that no executive should be paid more than $X more than the lowest paid employee of a firm, or are just angry at the seemingly wasteful and lavish life styles of Wall Street bankers, you still have to find this sort of proposed legislation abominable. Why? Because no matter what you think about executive compensation, the owners and operators of these companies think otherwise. It’s their decision to make about how their companies are run and how well their employees are paid. Unless, of course, you would just fine and dandy with some government bureaucrat deciding that you are overpaid for your position, and that no matter how hard you work you can never make more than $Y.
The only people who would ever agree to such slavery are those who have no ambition and little, if anything, to offer the world in terms of work product. They are not the people who invent the items, create the ideas, or provide the services that make our lives better over time. That is not to say that their efforts are not appreciated, nor that they shouldn’t be rewarded. But neither should we base the engine of wealth creation on their hopes and dreams of sinecure.
Beyond the egregious assault on freedom these proposals represent, there is also a huge question as to their efficacy, regardless of whether the firms are troubled or not (my emphasis):
Compensation experts in the private sector have warned that intrusions into the internal decisions of financial institutions could discourage participation in the rescue program and slow down the financial sector’s recovery. They also argue that it could set a precedent for government regulation that undermines performance-based pay.
“One of the big questions is whether it will make it more difficult to recruit and retain executives at these companies,” said Claudia Allen, chair of corporate governance at the Chicago-based law firm of Neal, Gerber & Eisenberg.
The $500,000 cap “is a very tight limit,” she said.
Timothy J. Bartl, vice president and general counsel for the Center On Executive Compensation, said the president’s actions are a unique situation given the government’s role bailing out troubled institutions.
“We do not view it as something that ought to be extended beyond this circumstance,” he said.
I don’t think there’s any legitimate doubt that these will be the effects. Indeed, here are some of the reactions to Obama’s proposals:
Goldman Sachs said yesterday it wants to repay $10 billion it got from Treasury under the TARP to signal the firm is healthy and to escape limitations that came with that infusion of money. “Our financial condition is sound and, subject to approval from regulators, we hope to repay TARP money as soon as practicable,” said Lucas van Praag, a spokesman for New York- based Goldman Sachs.
JPMorgan CEO Jamie Dimon said Feb. 3 that the firm didn’t need capital and didn’t ask for TARP funding. The lender accepted the $25 billion it received from the first capital injection at the request of the government and to help stabilize the banking system, he said.
Goldman has to get permission to repay the government? Does that make sense? Only if the reason the funds were distributed in the first place was to give the federal government control over the market place. I think that’s exactly what Bush (“I’ve abandoned free-market principles to save the free-market system”) and Paulsen had in mind with TARP, and I think Obama is prepared to carry the ball even further into socialist territory.
As far as retaining talented executives, why would any of them stay? If you were making $10 Million per year including your bonuses (not uncommon), why would you stay somewhere that’s forcing you take a 95% pay cut? Of course, many will say good riddance to bad rubbish, and perhaps their right. It’s not like a firm that goes crawling for a federal handout was performing all that well. Except that (a) it’s far from clear that bad management led to the current crisis (although, surely that had something to do with it), and (b) even if it were clear, not every executive or potential executive was responsible. If you are a rising star in your investment bank who has put in exhaustingly long hours to get ahead in hopes of a big payday in the future, why would you stick around where you know your options are limited? These are very smart, industrious and capable people. There are plenty of places where they can go and not be subject to such pay strictures, and that is where they will end up.
Moreover, a part of the proposed regulations practically eliminates the fabled “golden parachutes” for executives:
Obama said that massive severance packages for executives who leave failing firms are also going to be eliminated. “We’re taking the air out of golden parachutes,” he said.
This displays a fundamental misunderstanding of what golden parachutes are. Contrary to popular belief, they are not generous giveaways to failed executives, but instead incentives for failed executives to get out of the way and allow new management. Without these sorts of incentives, management becomes entrenched and complacent. If a proposed takeover threatens to take away the goodies they can vote themselves, then they will forego such proposals and keep cashing in. In order to align management’s interests with the shareholders, golden parachutes were introduced to incentivize firm managers to sacrifice their jobs when the best interests of the company warrant it. Since one of the major problems that everyone seems to have with Wall Street is the failure of effective management, one would think the new rules would make it easier to bring in new blood, not harder.
But none of that matters to Obama:
Mr. Obama said the cap strikes the right “balance” between fair compensation and proper stewardship of taxpayer funds. “This is America. We don’t disparage wealth. We don’t begrudge anybody for achieving success. And we believe that success should be rewarded. But what gets people upset –and rightfully so–are executives being rewarded for failure, especially when those rewards are subsidized by U. S. taxpayers.
“For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste, it’s a bad strategy — and I will not tolerate it as President.”
Again, it’s hard to generate much sympathy for executives who’ve come begging to Washington. But at the same time, what point is there to heavy handed measures that don’t do anything more than satisfy some people’s jealousy and outrage? Shouldn’t these proposals be designed to put people back to work?
Gloom, doom and revolution are in the air:
France paralysed by a wave of strike action, the boulevards of Paris resembling a debris-strewn battleﬁeld. The Hungarian currency sinks to its lowest level ever against the euro, as the unemployment ﬁgure rises. Greek farmers block the road into Bulgaria in protest at low prices for their produce. New ﬁgures from the biggest bank in the Baltic show that the three post-Soviet states there face the biggest recessions in Europe.
It’s a snapshot of a single day – yesterday – in a Europe sinking into the bleakest of times. But while the outlook may be dark in the big wealthy democracies of western Europe, it is in the young, poor, vulnerable states of central and eastern Europe that the trauma of crash, slump and meltdown looks graver.
Exactly 20 years ago, in serial revolutionary rejoicing, they ditched communism to put their faith in a capitalism now in crisis and by which they feel betrayed. The result has been the biggest protests across the former communist bloc since the days of people power.
Europe’s time of troubles is gathering depth and scale. Governments are trembling. Revolt is in the air.
Capitalism, of course, is the reason, or at least the cause used by European socialists, to lay blame for this crisis. Forgotten, of course, is the standard of living capitalism has brought to these same people over decades despite their every effort to blunt and subvert it’s bounty through government.
Forgotten by those in the east who survived communism 20 short years ago is the marked difference they found between the east and west and how long it took them to recover from the ravages of communism.
I’ve always heard we human beings have very short memories. And I’ve also heard we always believe that the times we live in are the worst. Ever.
How else do you explain this belief that suddenly the world’s problems can be traced to evil capitalism? But it is truly under attack around the world.
In some places the attack on its foundations is blatant. Consider Bolivian President Evo Morales’ recent speech to the UN:
I think that that capitalism is the worst enemy of humanity and if we do not change the model, change the system, then our presence, our debate, our exchange, and the proposals that we make in these meetings at the United Nations will be totally in vain.
Capitalism has twins, the market and war. The market converts life into commodities, it converts land into a commodity. And when capitalists cannot sustain this economic model based on looting, on exploitation, on marginalisation, on exclusion and, above all, on the accumulation of capital, they rely on war, the arms race. If we ask ourselves how much money is spent on the arms race — we are never concerned about that.
This is why I feel that it is important to change economic models, development models, and economic systems, particularly those in the western world. And if we do not understand and thoroughly discuss the very survival of our peoples, then we certainly not will not be addressing the problem of climate change, the problem of life, the problem for humanity.
Morales, of course, attempts to blame all the ills of colonialism and its aftermath exclusively on capitalism, while ignoring any benefits accrued. He also manages to ignore the oppressive nature of that colonial period and the simple fact that it really didn’t represent capitalism as much as rule by oligarchs. The oligarchs, in many cases did “loot”, “exploit” and “marginalize”. But not under the auspices of a system called “capitalism”.
A simple and rational examination of what capitalism is versus what his country experienced would help Morales understand that capitalism isn’t the cause of his people’s suffering. And while I can empathize with his concerns for the rights of indigenous people and the environment, the system which provides those rights and the wealth necessary to address both issues isn’t the populist brand of socialism to which he and Venezuelan President Hugo Chavez subscribe.
And while Chavez and Morales provide the more obvious attacks on the capitalist system, there are much more subtle ones ongoing in Europe and the United States. The article I cite above is a good example of that trend. The fact that Europe was brought so quickly to the precipice isn’t because of capitalism, but instead because so much of life is dependent on the state. And when finally the state – as we saw with Eastern Europe and the Soviet Union – can no longer carry the financial load it has burdened itself with, the whole system eventually collapses.
Funny that the less capitalistic nations of Europe where the state has assumed a more intrusive role in its citizens life seem to be facing a deeper and more immediate financial crises than are others.
But that’s not because the same sort of attempt to subvert capitalism even more isn’t at work here as well. Some time last year, I grabbed a quote from Stephen Bainbridge’s blog (forgive me, I don’t have a link) and it distills well the essence of the evolution of blatant socialism, which is rather unpopular, to a more stealth version of the ideology which we have been seeing for some time. This was written during the recent campaign:
When I think about Obama, I am reminded of Richard Epstein’s observation that in order to remain politically viable modern socialists no longer advocate direct government ownership of production. Instead, modern socialism operates on two different levels: “At a personal level, it speaks to the alienation of the individual, stressing the need for caring and sharing and the politics of meaning. At a regulatory level, it seeks to identify specific sectors in which there is a market failure and then to subject them to various forms of government regulation.” Sounds a lot like Obama’s stump speech to me.
Sounds very much like the government that has formed and is now operating. Isn’t the Obama administration forming a “Middle Class Task Force”? If that doesn’t speak to framing “alienation” I’m not sure what does. And we’re presently hip deep in the ramping up of a new regulatory regime aimed at ensuring we never suffer a new bout of failed markets no matter how many banks they eventually have to nationalize and despite the fact that government was a big part of the problem.
Consider Epstein’s main point above – In order to hide old school socialism enough to make it acceptable today, the populist message had to be tweaked. With the failure of socialism/communism in the USSR and eastern Europe, “direct ownership of the means of production” came to mean two things – gross inefficiency, the mega-state and crushing oppression.
People everywhere came to identify socialism/communism with those damning characteristics. That forever removed it from the pantheon of acceptable ideologies, although (see Chavez in Venezuela who is unapologetic about it) there are still a large cadre of true believers who are sure that the only reason socialism hasn’t worked is it hasn’t been properly done yet. And, of course, they’re the people to do it. For the most part, these people are found on the left side of the political spectrum.
Facing utter rejection, at least in the US if the “S-word” is used, it has become necessary to hide it in a populist message and, then, create a victim class and a villain. It is no longer the proletariat who suffers under the yoke of the oppressive monarchy, but instead, the “bitter and frustrated” voters of rural America. Or the middle class.
As Epstein points out, it is necessary to paint a picture of alienation of the individual from the system in order to attack the system. Establish that narrative and suddenly “hope” and “change” take on a new and easily manipulated meaning.
Once that narrative is established, then the “enemy” has to be identified. The entity or entities which are responsible for the alienation of these individuals have to be identified and called to task in order to establish the framework necessary to make the collectivist premise of bigger and more intrusive government palatable.
Wall Street. Big Oil. Big Pharma.
Ironically, the mega-state remains the answer to the dilemma which it helped create. The narrative necessarily asks how successful, without government intrusion, a small-town voter (aka “the victim”) can be in standing up against the legions of Washington DC lobbyists writing bad law or greedy “big oil” sucking your wallet dry and paying outrageous CEO salaries?
Victim class, oppressor, superhero (the government) to the rescue. Never mind that the superhero has been a much a part of the problem as any other entity involved and more so than most. This too is a classic part of the cycle. Government causes a problem, identifies the victims and the transgressors (without government being counted among that group) and it gathers the power necessary – or, more likely, has it ceded to it – to “right the wrong”. Of course, it never gives up the power it gathers.
End result – bigger government, more government power, more government intrusion.
If you can’t see that on the horizon right now, then you are indeed politically blind and will probably do well under the new state regime which is presently being built.