Santa Claus Comes to Wall Street
Things have not gone well on Wall Street this year. Depending on the year-end news, the stock market looks at best to have eked out a small gain for the year. The record setting pace of mergers and buyouts in the winter and spring had dwindled to a trickle in recent months. And, some of the great citadels of Wall Street, like Citigroup, Merrill Lynch, and Morgan Stanley, have been forced to eat billions of dollars in write-downs on the complex financial instrumentals they had peddled to their customers.
The bad news also showed up in stock prices. Morgan Stanley’s stock is down almost 20 percent for the year. Lehman Brothers stock was down a bit more than 20 percent. And Citigroup’s stock price is down almost 50 percent from its level at the beginning of the year.
With a year like this, you might have expected that most of the Wall Street gang would be waking up on Christmas morning to find lumps of coal in their stockings.
But, that’s not the way that the modern economy works. According to the Associated Press, bonuses on Wall Street will be up a healthy 14 percent over last year. In a year in which tens of millions of families are struggling to pay their heating bills and hang onto to their homes, it seems that Santa still has a soft spot for the folks who cut deals on Wall Street.
It’s questionable whether the stockholders of these companies really think that the people responsible for tanking their share price deserve a special year-end reward for performance. However, the stockholders don’t have all that much say in the matter. Management generally gets to call the shots in corporate governance because they largely control the election process that selects the people who determine whether they stay in their job and how much they get paid.
Typically, corporations count unreturned share-holder proxies as supporting management’s position. This means that if 30 percent of the shareholders (by number of shares owned) don’t return their proxies, then management needs the support of less than one-third of the people who actually vote in the election to get their way. Suppose incumbents in Congress got to count all the non-voters as supporting their re-election. This is pretty much the way things work in corporate America, which is why shareholders now find themselves handing out big bucks to top executives no matter how badly they screw up.
Of course, it’s not just the shareholders who are generous with the Wall Street crew. All of us, as taxpayers, have done our part to ensure that these folks have a happy holiday season. In particular, we deserve thanks because we gave hedge and equity fund managers a special tax break that allows them to pay a much lower tax rate than workers like fire fighters and school teachers. The fund managers’ tax break allows some of the richest people in the country to pay a tax rate of just 15 percent on their earnings, as compared to the 35 percent tax rate that they would face if they had to pay taxes like ordinary workers.
Congress did consider eliminating the fund managers’ tax break this year, but a determined lobbying effort saved the day. The fund managers told Congress that if they had to pay the same taxes as everyone else, their hundred million dollar salaries would not give them enough incentive to work. Undoubtedly some sizable campaign contributions made this argument more compelling to members of Congress.
One of the leaders of this lobbying effort was Peter Peterson, an investment banker with the Blackstone Group, a private equity firm that earned Peterson and other partners billions when it went public this year. Mr. Peterson is primarily known for having spent much of the last fifteen years arguing for cuts in Social Security and Medicare for people like school teachers and firefighters. When arguing for these cuts Mr. Peterson routinely asserts that he does not need his Social Security. With the tens of millions in tax breaks he gets from the government, this is surely true.
So, as we celebrate the holiday season, we should be pleased that little Pete Peterson and his incredibly rich friends are enjoying a very merry Christmases due to our generosity as taxpayers and shareholders. If these folks actually had to rely on the market for their livelihood, their holiday season might be considerably less festive.
Re: It’s questionable whether the stockholders of these companies really think that the people responsible for tanking their share price deserve a special year-end reward for performance.
The people directly responsible for the debacle aren't getting bonuses: they've already gotten pink slips. And at least two of the major CEOs have declined their bonuses (don't cry for them, they make 800K or so a year). The people getting bonuses are the ones who came to work and did their jobs and perhaps a bit extra. Not everybody who works for a bank is rich as God. Most employees are just middle class folks trying to make ends meet. Why begrudge them a little extra? The politics of resentment is getting a bit out of hand.
December 24, 2007 6:32 PM | Reply | Permalink
When the rich are getting richer and the poor poorer at rates such as these, resentment is the natural result.
If the financial industry (and insurance, and defense, and pharma, etc) wants to stave off this resentment, they can stop lobbying against what the people want.
As they say here in NASCAR country: lead, follow, or get the hell out of the way.
December 24, 2007 9:27 PM | Reply | Permalink
The people directly responsible for the debacle aren't getting bonuses: they've already gotten pink slips.
No bonus, just severance packages, worth $40 million in the case of Citibank's Charles Prince, the bank that is the king of usury and sub-prime racketeering, plus: the former CEO will also be entitled to an office, administrative assistant, and car and driver for five years, or until he starts working elsewhere full-time.
December 25, 2007 11:11 AM | Reply | Permalink
And also, none of these financial institutions will be closing their doors due to being put out of business by regulators, either. The racket
starts with Freddie/Fannie and goes from there...
December 27, 2007 5:32 AM | Reply | Permalink
sorry, anyone who gets over 100k a year is not middle class -- at least not on this planet. They might be a rich person who has trouble with numbers, but they are not middle class.
December 24, 2007 8:35 PM | Reply | Permalink
Excuse me?! 100k a year may have been alot 30 years ago, but it ain't now, and certainly not anywhere within 30 miles of Boston. I make 97k and we live in a 2-bedroom ranch house on a half-acre lot, and I drive a 10 year-old Honda to work. But, according to you I'm only 3k/yr away from being officially "rich". Please. Just stop it. I challenge you to find a single luxury item in our possesion that would indicate that we're anything other than middle class. My definition of rich is "money to burn", and we do not have any of that. At all. An unexpected bill for more than $500 or so puts me in panic mode. I am not rich. If you think 100k a year is the dividing line between the middle and upper class, you're high. If you drive down our street and think you're in a rich neighborhood, seriously, you should lay off the acid for awhile.
December 25, 2007 2:00 PM | Reply | Permalink
If you're grossing 97k/yr, I don't care where
you live, you're not suffering by any stretch of the imagination, and if you are, then maybe you need to cut it back to four pay-per-view movies per day or something.
December 27, 2007 5:35 AM | Reply | Permalink
I never claimed to be suffering. Does "middle class" == "suffering"?
December 27, 2007 11:16 AM | Reply | Permalink
Homeless on the street in summer is not exactly suffering, either. It is freedoms that used to be considered middle class, such as home ownership and higher education, that define.
December 27, 2007 11:18 AM | Reply | Permalink
And anyway, how can you assume someone isn't suffering without knowing anything about the person's particular situation?
Forget pay-per-view. What if its not excessive TV watching, but a family-member with cancer and no insurance? Both situations are quite common these days. Typical cancer drugs would wipe out most of my take-home-pay. Forget about my mortgage and car payment at that point. Just check out nyceve's Horror-Show-of-the-Week Club over at dKos for some real life examples.
See there? And I didn't even have to stretch my imagination after all. How about that?
But, as I said before, I never claimed to be suffering. I'm not. I'm just not rich. Not even a little bit. No one will ever mistake me for a rich person, regardless of what Mr. Baker's charts and graphs say.
Don't believe me? Why don't you come over and stay for a week. You can follow me around, spend some time with me. Bring Dean Baker with you. We don't have a guest room, so you'll have to arm wrestle each other for the couch (and you'll have to kick the dogs off). The loser will have to sleep on the floor, so bring a sleeping bag. If at the end of the week, you can look in my face and tell me I'm rich with out cracking a smile, then ... well, we'll have to think up a suitable prize. At the very least I'll concede the argument.
What really has me ticked off is these blanket statements that such and such an income equals such and such a class. It just does not work that way. Its not up to you or Mr. Baker to decide who's in the upper class. The board of your local country club will make the determination for you. Its pretty much their job. If you cannot marshal the financial and/or social forces necessary to gain entry to your local country club, then you are not a member of the upper class. Period.
(And for the record, I couldn't care less about country clubs. I'm just saying its not an option.)
December 27, 2007 1:04 PM | Reply | Permalink
Well who should we call rich? Stealing from WSJ's Robert Frank (quoting Piketty and Saez) for 2004 the numbers were:
INCOME GROUPS IN THE U.S.
Median — $25,076
Top 10% — $87,334
Top 5% — $120,212
Top 1% — $277,983
Top 0.5% — $397,949
Top 0.1% — $1,134,849
Top 0.01% — $5,349,795
So $100K didn't even buy you into the top 5% of incomes three years ago. So is being in the top 7% rich? When compared to the top 1%? The top 0.1%? And is there a difference between those whose incomes come solely from their labor and those whose incomes come solely from investments; and in the latter case, do you count the elderly?
Over the past couple decades inflation has reduced the value of a $100K salary. A dollar today is worth something like fifty cents in 1980 dollars, so someone making $100K today is really not making more than someone who made $50K in 1980. That salary qualified for upper-middle class then, and $100K is the same today.
How's that for having trouble with numbers, Dean?
December 25, 2007 3:36 PM | Reply | Permalink
You're on the right track. But there's more to it than just adjusting for inflation. There are also geographic factors. 100k in SF or NY is nowhere near the same as 100k in St. Louis or Dallas, for instance. Mr. Baker seems to think its just a function of which planet you're on, but he is badly mistaken.
Also, there are other factors, like debts, medical expenses, and other unavoidable expenses. Whether someone should be considered "rich" should be a function of disposable income and/or liquid assets, not just gross income.
Here's the acid test: If you can walk into a restaurant and not panic when there are no prices on the menu, then you're rich. If you can't, then you're not. Its as simple as that.
December 25, 2007 6:16 PM | Reply | Permalink
Hey Rocket Engineer,
You apparently want to put the top 10 percent in the middle clas, and I guess those from the 90th percentile to the 99th percentile. That's fine, but I prefer the normal usage of the terms.
I don't doubt that plenty of people in these income categories have trouble making ends meet, but that doesn't make them middle class. Would you put people in the bottom 10 percent (those living below the poverty line) in the middle class too?
December 26, 2007 6:01 AM | Reply | Permalink
I don't see your point, Dean. There is no 'normal usage' of those terms. The usage is entirely situational.
The issue is the ongoing and massive redistribution of wealth into the hands of a tinier and tinier elite, the shrinkage of the middle class and the growth of the underclass.
Take El Salvador. One could say there that the Elite who control 90% of the countries wealth represent 1 tenth of 1%. The Middle class represents the top 10 or 15% under that 1 tenth of 1%. The underclass is everyone else.
But why take El Salvador, that's the direction America is heading now...
December 26, 2007 11:34 AM | Reply | Permalink
The fact that most Americans can't afford to own a house and pay for college is the point.
Middle class means,to me, the financial freedom to send children to college and to own property. That is why we would call 100K middle class. Lower class would reasonably be described as subsistence but not much more, that is, paying rent and not saving. Upper class would be to have no financial challenges except by choice. That is, owning multiple properties and having choice about which college to attend. This is not likely with $100K pretax income for a family.
December 26, 2007 5:00 PM | Reply | Permalink
That is exactly right.
I have this suspicion that Dean is actually naively carving the income percentiles in thirds and saying the bottom 1/3 is lower class, the middle 1/3 is middle class, and the top 1/3 is upper class. Unfortunately, we can only guess since he won't explain where he's drawing the lines, other than stating he's drawing them in the "normal" place. Please, tell me that's not what you're doing, Dean.
So using that calculus, if you have a population made up of 99 homeless bums and Bill Gates, then 33 of those bums will be in the upper class with Mr. Gates because they happened to panhandle more spare change than the other 66 that day.
Col. Potter: "Horse hockey!"
I've got to side with the colonel on this one. The upper class in the above scenario is the upper 1%, the lower class is the bottom 99% and there is no middle class. There is no "normal" or proper place to draw class lines without looking at living standards or financial freedom.
December 26, 2007 10:09 PM | Reply | Permalink
You prefer the normal usage of the terms, do ya? Maybe we really do live on different planets, Dean. Because I've never heard anyone call someone having trouble making ends meet "rich". The word "rich" in any "normal" usage I've ever heard implies a level of financial fluidity that is far, far beyond being able to simply make ends meet.
Using raw income to classify people financially, without regards to at least geographic factors, is really naive. These classifications should be used to describe standard of living, or at least level of financial freedom. If not, then really, what good are they?
I live pretty much the same life-style that I did growing up. It was called middle class then, and as far as I'm concerned it still is. It just takes more dough to cling on to that life-style today, Dean.
I live on a street full of ranch houses and split-levels that went up in the 50s. We're not right on top of each other, but I could easily throw a snowball over my neighbors' houses on either side of me. The few pools in the neighborhood are all above ground. Pretty much the textbook definition of a middle class neighborhood. The nearest McMansions are about 2 miles away. On the other hand, there's a trailer park half a block from me. And we live in the nicest situation that our income allows. But, it is not rich, or upper class, or whatever you want to call it. Not, by a looong shot. Not by any "normal" usage of the terms I've ever heard.
And yet, I awoke yesterday and discovered that after 40 years of living a textbook middle class life, I've suddenly been reclassified as "rich". Nice Christmas gift, Dean. Thanks for the thought, but, I mean really, you're full of it. I feel like the first wave of Hispanic "immigrants" in the 1840s. They didn't cross the border. The border crossed them.
If whatever naive calculus you're using, based solely on gross income and planet of residence, doesn't actually correlate to certain standards of living, then I ask you again, I'm really asking you, What good is that classification scheme? Why should I care what class I belong to if it doesn't determine my standard of living? Why should anyone care?
And when I said textbook middle class before, I meant it literally. I remember learning about it in social studies class, Dean. At St. Stephens High School, the public school that I rode the bus to. All the kids in the neighborhood I live in today ride the bus just like I did when I was a kid. Just like most suburban middle class kids do. As far as I know, no one around here goes to private school. And neither will our kid unless he gets a hockey scholarship, or something. There does happen to be an elite prep school here in town, and many of the kids arrive there in September by helicopter. Many of the others arrive in chauffeur-driven town cars. (That's because they're rich, Dean.)
We're not poor, all of our basic needs are being met. But, we don't have money to throw around, we really don't. We have to watch our budget. That's middle class. M.i.d.d.l.e. C.l.a.s.s. And, yes, that is the "normal" definition of the term. If its not normal where you are, then maybe you should try leaving the confines of whatever DC think tank you're working at and come visit our planet before you try deciding who's middle class and who's rich around here. At the very least you need to revisit whatever calculus you're using to classify people, because it clearly isn't working anymore. Not in any useful way. If the level of income required to maintain the lifestyle I just described is increasing, or the percentage of people living above that standard is shrinking (which is what I'm reading in between the lines of this thread), then those are very interesting trends, Dean. Very interesting. But, you don't seem to be at all interested in looking into that, or even acknowledging it. You're just going to call a bunch of traditionally middle class people rich, because some table of percentiles tells you so. Your model no longer corresponds to real life. You need a new model.
Not convinced? You want a middle class shibboleth? Fine. I just bought a dozen eggs at the variety store down the street, and it cost me $2 even. Show me a rich person that knows (or cares about) the price of a dozen eggs. I can't tell you the price of milk, because nobody in our house drinks it.
December 26, 2007 7:26 PM | Reply | Permalink
wow, bold letters, now we're getting real serious. You can call yourselves anything you damn well please, but people who earn over $100,000 a year are earning more than three times what the median workers earns. I'm sure you can relate.
Yeah, some country clubs won't take you and the pool is above ground, life is real tough. Those earning above $100k are among the winners in the conservative nanny state. They didn't win as much as Bill Gates and the hedge fund boys, but they got more than their fair share. If life is still tough -- well, I'll have to wait a while for before I start crying. (btw, since most families have multiple earners, and most people earning over $100k also have investment income, earning above 100k pretty much assures you a spot well into the top 10 percent.)
December 29, 2007 6:56 PM | Reply | Permalink
Dean,
Thanks for responding. So, I've had a couple days to cool off from my tirade. And I've got a proposal for you: I'll try to drop my snotty tone if you do the same. I know its childish to say, "But, he started it", but is was the tone of your original comment that set me off:
sorry, anyone who gets over 100k a year is not middle class -- at least not on this planet. They might be a rich person who has trouble with numbers, but they are not middle class.
Translation:
"not on this planet" - if you disagree with me you're on a different planet, i.e. you're crazy
"trouble with numbers" - or you're just plain stupid
Since I did disagree with you and don't like being called crazy or stupid, I got angry and pretty much called you stupid and crazy in return. I apologize. Now can we both cut the crap, and debate this? You have not addressed any of the points I was trying to make, and just keep pointing out which percentile 100k occupies.
I am not arguing that my life is tough. Its not. If you thought that was what I was arguing, then please reread what I wrote.
I also am not arguing that I don't make far above the median. And I am not arguing that I am not in the top 10% of earners.
I am arguing that proximity to the median has absolutely nothing to do with being in the middle class today. I'm getting the impression from rereading your comments that you are insisting that the middle class, as you define it, must straddle the median somehow. That is just wrong, wrong, wrong. Someone offered El Salvador as a counter example that clearly refutes your assumption. The folks occupying the median there are probably living in poverty, actual poverty. And any middle class is probably far up toward the top of the scale. And the middle class there are probably earning many times the median. Doesn't matter. Poverty is poverty and middle class is middle class no matter where on the income spectrum you may find them for a given society. Like the definition of obscenity, I know it when I see it. It has to do with living standards, not position relative to the median.
Class structure is based on degrees of financial freedom, and the ability to attain or gain access to certain things. Tom Wright mentioned home-ownership and ability to send the kids to college as hallmarks of the middle class, and that's the way I learned it too. The median household income in 1976 according to the US Census was $36k. That's about what my dad was making. Add in my mom's part-time income and it was a bit more than that. Interestingly (to me, if not to you) was that they bought their first home that year, for about that same amount. So the median income in 1976 was about the price of a starter home. That house was roughly the same size as the house I'm in now. The neighborhood then wasn't quite as nice (a bit more tightly packed) as the one I'm in now, but was comparable. The median household income in 2003, again according to US Census, was $43k. My wife and I bought our first home that year. Would you believe there weren't any $43k houses available? Really, the market started at about $200k around here. We paid (mostly borrowed) $270k. And just so we can compare apples with apples, I just checked listings for the area where my parents bought that house in 1976, and a similar house (3 br 1.5 bath) on the same street is on the market now for $325k. Heck, I probably delivered newspapers there. So, the cost of housing has gone up, according to my admittedly less than scientific methods, a whopping 800%, while the median income has gone up 20%. If the cost of one of the pillars of the middle class has gone up so drastically, with respect to income, shouldn't that figure into your calculations somehow? Can a couple making $43k even afford a house at all today? If they can't, then they do not belong to the same "middle" class as a couple, like my parents, earning the median 30 years ago.
The cost of the other pillar of middleclassdom, higher ed, has also grown faster than income. As has the third, heretofore unmentioned pillar, access to health care.
The way I interpret the fact that I'm in the top 10% and yet, oddly, still occupying the same station in life as when my parents were earning the median, is that the price of a traditional middle class life is going up, way up, and fewer people are able to attain it. I know I'm not alone in that interpretation. There are books being written about it. The street I live on is one of the original post-WWII suburbs, built to house the New Deal middle class. Nothing screams middle class like a row of ranch houses. The people who live here have always been middle class. Today it costs nearly half of my take-home pay (on 97k/yr) to live here. And its hamburger. Its nice hamburger, don't get me wrong, ground sirloin, no flys on it. But, hamburger nonetheless. It is currently being repackaged as steak (by yourself and others), and sold at a considerable markup. But, sorry, its still just hamburger. Its a middle class life. So, it seems that fewer people are able to afford even the hamburger (never mind steak) and are having to eat beans instead. They're being told to accept less, pretend its more, and pay through the nose for it. But, they're soothingly reassured by you that they're still in the middle class, and that the people they should resent are the "robber barons" who are lucky enough to still be able to afford the hamburger.
Those earning above $100k are among the winners in the conservative nanny state. They didn't win as much as Bill Gates and the hedge fund boys, but they got more than their fair share.
Oh, brother. You're really testing my resolution to not be snotty. *sigh* More than my fair share, eh? That certainly is one way of looking at it. Another way of looking at it is that, if it now takes a top 10% income to afford a life-style that my parents enjoyed at the median 30 years ago, then most Americans are now getting far less than their fair share. The stuff I have is what used to be considered a "fair share". As far as being one of the winners in the Bush economy, I guess it depends on how you look at it. I am a winner, but not in the way you apparently mean. I won because I still have a job in my career, at least until they can find someone in India to do it. I won because I was lucky enough to keep my seat in the ever-shrinking game of musical chairs that is the modern American middle class. For today. But, check back next year. And if you're a betting man, you should bet on me being more downwardly mobile than upward. Because I ain't in the failing upward set that you described in your post.
It seemed to me that the point of your post (which I agreed with) was that the rules are different for people at the top of the heap. For most of us (myself included, sorry Dean), if we win we win, and if we lose we lose. For those at the top, if they win they win, and if they lose ... they still win. What I'm chafing at is being included in that group by you or anyone. I do not belong to that group, and I'm nowhere near it. I work in an industry that's particularly vulnerable to outsourcing and I've been laid off three times. Twice in the past 2 years. In fact I've spent 4 months unemployed in the past 2 years. It could happen again literally at any time. And, I can assure you there are no golden parachutes here in coach (which is where I fly, literally and figuratively). For two of the layoffs I got 1 month's salary for a severance, for one of them they continued my medical for 2 months beyond my severance date (a gift for which I was very thankful). For one of the layoffs, I got nothing. No parachute of any kind. I'm clearly not in the same class as the people you're talking about. Please don't confuse me with the real robber barons.
And btw, the 97k is our combined household income and we don't have any investment income. Not that I expect it would matter to you.
December 30, 2007 7:11 PM | Reply | Permalink
Years ago, I had an uncle who was an officer in one of the largest Fortune 100 companies in the country who, with no sense of irony whatever, used to refer to those making more than he as the "other half."
“In the upper classes, it does not by itself mean much merely to have a degree from an Ivy League college,” C. Wright Mills wrote in “The Power Elite,” his 1956 critique of establishment society. “That is assumed: the point is not Harvard, but which Harvard? By Harvard, one means Porcellian, Fly or A.D.; by Yale, one means Zeta Psi or Fence or Delta Kappa Epsilon.” To have belonged to one of these organizations, he went on, constituted “the standard admission ticket” to the American upper class. NYT 12/30/2007
And my uncle was a Deke at Yale, no less!
December 30, 2007 7:42 PM | Reply | Permalink
I understand what you're saying, Ellen. It is well understood fact that people, Americans at least, tend to judge their station by looking at those above them. I know someone like your uncle. The guy's a multi-millionaire, and owns many properties, including a waterfront condo in West Palm. And he refers to the folks across the water in Palm Beach proper pretty much the same way as you describe, maybe not in so many words. He's loaded, but its the people in Palm Beach who've really "made it". But, if I've come across as sounding like I'm whining because there are other people who are better off than me, then I've failed to make my point.
The main point I've been trying to drive home, in vain it seems, is (sorry for the bold letters again, Dean, but I'm sure you'll still manage to miss the point): the life-style enjoyed by people earning the median income 30 years ago (like my parents, and their parents) is no longer attainable by people at the median today. So does it make sense to still refer to people at the median as middle class? I say no, and Dean Baker apparently says yes. The middle class is being defined downward just to shoe-horn it into the spot where Dean thinks it belongs.
We spend about 42% of our take-home pay (from a top 10% income) on our mortgage, and we live in a house that is near the low end of the market. As incredible as it seems, at least in this part of the country, a no-frills starter home (one-story 3 br 1.5 bath) costs about a quarter mil. A median income earner could've easily afforded this same house in the 70s, but no one earning $43k can afford this house today, or any house in this area. And we moved to this town because the houses here are relatively cheap! Where we were renting before, in my wife's home town about 10 miles from here, this same house would easily go for $400k. She comes from a middle-class family too, and they're all leaving town one by one, because they can't afford to live there anymore.
If you're looking for what's killing the middle class, I think you need look no further than housing costs.
I honestly couldn't care less about being rich, meaning its not something I strive for. I get so sick of the whole damn rat race that I think I'd be happier living in a tepee and doing subsistence farming, foraging, and fishing. But, I've got a family to support and they don't want to live in a tepee. So, no, I don't really care how "the other half" lives, Ellen. I just didn't much care for being demonized by Dean Baker, who seems to be lumping me in the same group as the robber barons he was writing his post about. So, I tried (in vain I guess) to describe the difference between rich people and people like us who have not much left over after paying our mortgage, two car payments (both are economy cars), and all the other fixed expenses necessary to get by. Disposable income is what makes you rich, not being in a certain income percentile.
There are people who have benefited greatly from the GOP policies of the last 25 years. And there are people who have managed to hold on to just what they had before. And then there are lots and lots of people who have gotten screwed. I am lucky enough to belong to the middle group, and we have managed to break even by earning way more money than our parents ever had to just to attain the same damn things they attained. But, that's all we've done is break even. Apparently, narrowly avoiding getting screwed with everyone else, means I should get blamed for the screwing. That's not exactly blaming the victim, but it certainly isn't blaming the perpetrators. There is indeed a class war going on, and if anyone still thinks I'm on the winning side of it, I really don't know what else to say.
As for me? I know which side my bread is buttered on. My fate is tied to the fate of the middle class, even if Dean Baker thinks I don't belong there. And I will be voting for politicians who will fight, actually fight, for the middle and lower classes. I want to see the stuff the GOP has done actually rolled back. F**k bipartisanship. I'm pretty sure I'm voting for Edwards.
January 1, 2008 12:29 AM | Reply | Permalink
You apparently want to put the top 10 percent in the middle clas, and I guess those from the 90th percentile to the 99th percentile.
As much as I don't want to keep harping, I can't help myself. Because the above is asinine.
Let's examine a hypothetical situation. Although, I'll bet its not hypothetical everywhere. You've got a ruling elite that makes up a negligible percentage of the population, let's just say .0001%. A merchant class that makes up say 1.9999%. And the other 98% lives in poverty. i.e. they regularly go hungry. I'd say that the middle class in that hypothetical society occupies the 98th to 99.9999th percentile of the income spectrum.
But, you apparently seem to believe that that would violate the laws of nature. "Nope, nope. Can't have that. We must carve that middle class out of that 98% somewhere, where it belongs. Because ..."
Because, why, Dean? You won't explain why the interpretation of income data that you're ridiculing above is indeed ridiculous. You just say its not the "normal" way of defining it. If a "banana republification" of this country is truly going on, then wouldn't that be reflected in income percentiles exactly the way that you seem so eager to dismiss? Poverty, lower class, middle class, they would all start creeping up the spectrum. Until you reach the "impossible" (according to you) situation where the lower class occupies the bottom 98% and the middle class occupies the top 2%, and the insanely wealthy are, for all intents and purposes, off the books.
I eagerly await your explanation, although based on your comments so far, I expect to be disappointed. If the reasoning you've displayed so far is indicative of what goes on at the Center for Economic and Policy Research, then no wonder this country (I accidentally typed company there, Freudian slip) is so screwed up.
The odd thing is I enjoyed your post, and agreed with it for the most part. But, some of your comments in this thread are asinine.
December 26, 2007 8:57 PM | Reply | Permalink
Hello Dean,
I haven't had time to revisit this discussion, what with family and such in for the holidays. I see, however, that Deoll has been responding to you in a far more articulate, and cool-headed, manner than I could have.
That said, I'll happily throw more fuel on the fire. Since I enjoy playing the amateur psycho-statistician, I can definitively say that your mental picture of the three (?) classes in this country is an overly-simplistic Gaussian model with a neat three-way division having the "middle class" comprising the central third of the density function, thus making up a full 67% of the populace. In this neatly ordered model the upper and lower 16 percentiles are the upper and lower classes respectively. Neat, clear, simple, and wrong.
The income disparity that has been growing in this country over the past 30 years has rendered this model laughable. We now have the situation that the bottom 55% of the population comprise the "working class", "working poor", and "underclass" . Earning the median income now entitles you to "working class" status. The average income ($60,528/year) is nearly 40% greater than the median ($43,389). But earning the average income entitles you to "lower middle class" status.
In today's economy, earning $100K/year buys you into the middle of the "upper middle class" but no higher. In fact it is exactly what educated professionals earn, and educated professionals have always been the upper middle class. The Cosby Show expressed this 20+ years ago: "When you're middle class you work for your money. When you're rich your money works for you."
I apologize for not posting as clearly and articulately as Deoll; someday I hope to refine my writing to that level. Until then, let me close by saying, "Nyaaaaaahh!! Ppppppttttth!!"
December 31, 2007 7:34 PM | Reply | Permalink
I'm in your camp in that the income criteria feels like a weak indicator of class. If the relationship between income and freedom of action was smooth it might work, but there are discontinuous points in the curve.
I don't think anyone disputes that below some level, one is not merely having trouble but is actually poor. This happens when certain capabilities disappear completely, like taking any time off work, or getting a credit line. The next discontinuity, for me, is when the freedom to acquire real property and educate one's children is not met. That would be the middle class cutoff in my book.
If we decide that only smooth distribution will be used, we have to conclude that both owning a home and sending our children to college (other than community college) is reserved for the upper classes. I know of few in the roughly 100K range that can afford both of these items. Most get some mixture of grants and loans to pay for college.
After WW II, middle class meant homeowners and college-bound children. I guess not anymore.
January 1, 2008 8:14 AM | Reply | Permalink
Disclaimer: I work for one of these big Wall Street Banks. And guess what: I do NOT make 100K a year. Nor do I spend my days foreclosing on widows and orphans, or looting old people's retirtemnt money. My salary is a bit over median (and with my bonus it's a bit more, plus I have some outside income that lifts me up near the lower edge of the upper middle class). While I can't say for sure, I don't think any of my coworkers make 100K a year. I'm sure as hell not going defend the astronomical loot pulled in by hedge fund managers, like most folks here I think they should be taxed on it at normal rates. But I also see no reason to demonize an entire industry, and everyone who works for it, when most of those people make mere middle class wages.
We often lament the woes of the middle class and the fact that too few jobs are available that pay a good wage and good benefits even for the well educated. Well, I have a job that does and I refuse to be ashamed of it. In my case I loathe the modern GOP (and because I'm gay I especially loathe the religious right) so your broad tar brush is unlikely to drive me away from progressive candidates, but do you really want alienate voters like me by implying that we do not belong in the middle class?
December 25, 2007 5:09 AM | Reply | Permalink
What was the deal with John Edwards, first he's
mortgage hedge fund guy, now he wants to run
for office and say the business is all bad?
December 27, 2007 5:37 AM | Reply | Permalink
JPF311,
There are good hardworking people in every industry -- the tobacco industry, the pharmaceutical industry, the gun industry -- that is not the point. The industry's practices are still doing harm to society. The point is to design policies that prevent these industries from doing harm and not let them take their middle class workers as hostages.
It is a bad policy to give in to hostage takers. That applies to criminals with guns and it also applies to wealthy tycoons who warn us about the ordinary workers who would be harmed if we reined in their abuses.
December 25, 2007 5:43 AM | Reply | Permalink
I agree that there are some practices that should be more strictly regulated-- I already mentioned hedge fund managers. But I do not regard banking as being the equivalent of crack dealing or even tobacco sales. Good grief. You people are almost as bad as the far Right: find something to demonize and hold a bonfire for its immolation. Reinforces my notion that we'll be best off if HRC ends up in the White House.
I'm sorry, but I see nothing wrong with making (honest) money. Even making a lot of it. Predatory lending? Yes, of course that's wrong! Throw the book at those creeps. And yes, I'm on board for reforming the mortgage industry to prevent a recurrence of the recent folly. (But let's remember that it was fueled as much by borrowers and speculators as by lenders and bankers. Greed is an equal opportunity sin).
However, selling stocks and bonds is not inherently immoral. And yes, there's always some risks involved in any investment. I don't think you necessarily should blame the bank when things come a-cropper. The old Latin, Caveat Emptor, applies very solidly to any investment vehicle.
December 25, 2007 6:40 AM | Reply | Permalink
I don't recall ever saying that selling stocks and bonds is immoral, nor do I think that selling prescription drugs is immoral. I do think that many of the current practices of both industries are anti-social.
The subprime nonsense is the most obvious immediate example. Yes, there were plenty of dishonest people lower down the totem poll who also behaved poorly, but when going after a criminal enterprise you look to the generals, not the foot soldiers.
Wall Street performs valuable tasks for the economy. But, it would be even more valuable to the economy if some of the worst excesses were reigned in. Some of the problem lies with incredibly ignorant "sophisticated" investors. What on earth did they think they were buying when they got the subprime garbage? If part of this was due to deliberate misrepresentations by the Wall Street honchos, then I would be delighted to see these people spend the rest of their lives in prison and their entire fortunes pulled away from their families in fines.
On a deeper level, Wall Street's productive role in the economy is transferring capital from savers to investors. It was able to do this just fine 20 years ago when transactions costs were considerably higher than they are today. The drop in transactions costs has facilitated speculation which is more akin to gambling than investing.
I have nothing against gambling, but we tax it when people gamble at Las Vegas or Atlantic City or in state lotteries. Let's also tax it when people gamble on Wall Street. The communist United Kingdom has a 0.5 percent stock transfer tax and its markets seem to do just fine. I would love to see the same sort of tax in the Christmas stockings of the Wall Street crew. It would be almost invisible to the typical middle class investor, but it would take some of the thrill out of the speculating, and raise a $100 billion a year or so for the government. Sounds like a win-win to me.
December 25, 2007 7:30 AM | Reply | Permalink
The transfer tax is a good idea. I would add a few more rules: 1.Any stock or bond must be held for at least 6 months. 2.Every stock comes with one vote. period. 3. If a stock is not voted, it is not counted. (Today, most non-voted stocks are counted as a vote for the management.) 4. Buyers and Sellers of commodities must be in the business of creating or using that commodity. 5. No more calls and puts. There might be other good rules. The problem is that Wall Street is now a gambling casino rather than a vehicle to transfer savings to companys that need investors. I say kick out the gamblers, restore Wall Street to its original purpose.
December 25, 2007 8:22 AM | Reply | Permalink
Let's look at who caused the problem. Borrowers and speculators may have been greedy, but they were searching for and taking advantage of opportunities created by lenders and bankers.
The two groups are not remotely equally responsible for the housing bubble, the mortgage banking disaster and the related credit market crisis that grew as the rating agencies were bribed to pass out AAA ratings for garbage investments.
Lenders and mortgage bankers created the clearly unsustainable markets, and used the political power created by their wealth to bribe their (willing) politicians to avoid the regulation that every financial market requires. Without the greedy, irresponsible and crooked lenders and bankers (chief among them the idiot Alan Greenspan) and the rating agencies who got revenue only by auctioning off the AAA ratings (no greedy individual borrowers and speculators in THAT set of transactions - that's entirely unregulated and uncontrolled banking gone wild), the financial disaster now afflicting the American economy would probably not exist, and at worst would be a lot less severe.
By the way, the credit crisis is the perfectly predictable result of the elimination of the Glass-Stegall Act by the ideological conservative free-market Republicans in Congress in the 1990's, led by Sen. Phil Gramm. Phil and his wife Wendy also were directly responsible for the Enron disaster. Wendy rewrote the SEC regulations so that the SEC was not permitted to regulate the financial markets that Enron was creating and exploiting, then left the SEC to sit on Enron's Board as part of the Auditing Committee. All this while her husband was eliminating the Glass-Stegall protections that separated retail and commercial banking - Oh and Sen. Gramm also prevented the government from tracking financial transactions by terrorists and drug dealers as long as he was a Senator. Keeping track of large overseas banking transactions violated his conservative free-market small government ideology, and he had the power to enforce his ideology while he and his wife Wendy used it to get rich.
Compared to the Bankers, the politicians and the Libertarian free-market idiots who dominate the economic ranks of the Republican Party, the greedy borrowers and speculators are small and irrelevant fish in a gigantic and nasty storm created by the bankers and lenders.
Tell me - have the similarly unregulated organized crime drug dealers done nearly as much damage to as many Americans as the free-market bankers and politicians have? What's that old saying? The bank robbers steal your money with a gun. The bankers use a pen. The biggest difference is that the bankers steal so much more from so many more at any one time.
December 26, 2007 6:22 AM | Reply | Permalink
Dean, can I ask an unrelated question? You might know. A few years ago, some banks were closing infrequently used ATMs here in the city, no doubt to save rent and upkeep on the street space. In the last year, Chase added many ATMs (in drug stores), no doubt because it's good marketing to boast of having so many. But what surprises me is that many banks, including Chase, have been avidly adding branch offices as well, generally including tellers. Some have opened only recently, after the subprime debacle.
I'd have guessed that ATMs and online banking would reduce the need for human interaction, while commercial real estate is soaring in cost. What's going on? Was is the real-estate bubble? Was there expectation that if you just put human beings behind desks, people would walk in and ask them for a mortgage?
John
http://www.haberarts.com/
December 25, 2007 6:36 AM | Reply | Permalink
I can't understand JPF's irrational defensiveness, unless he believes that criticism of anyone or anything in the financial markets is criticism of "us all." Of course, in that case, he is making an argument of why he should be criticized and is responsible, even if no one here ever remotely suggested it, no?
John
http://www.haberarts.com/
December 25, 2007 8:40 AM | Reply | Permalink
And I can't understand except as plain old envy and resentment, why anyone would criticize people like me receiving a decent end of year bonus, the topic of this thread. You aren't my boss; by what standard do you judge whether or not I deserve that bonus? I've pretty much agreed that where unethical business practices exist they need to be dealt with; I am NOT making an argument against proper regulation and reform. I am making an argument against the politics of envy. As I said above, we constantly complain that middle class people get a raw deal from their employers, but when some of us do get a good deal at work, you people whine about it.
December 25, 2007 10:39 AM | Reply | Permalink
Don't be shy, JPF311.
Tell us what you did to warrant your "receiving a decent end of year bonus." Oh; and you might tell us how much it was or, in the alternative, what portion of your income for 2007 was made up of your bonus.
December 25, 2007 6:00 PM | Reply | Permalink
Oh, we know what he did to warrant his "decent end of year bonus." He occupies a job, and all know what success is. Woody Allen described it when he said "90% of success consists of simply showing up."
So JPF311 deserves his "decent end of year bonus" because somehow he pulled strings to occupy his job (Networking? Cronyism?) and he shows up regularly.
Who knows what his bonus might have been if he contributed something else to make the difference between the 90% he achieved just by showing up and the rest of what his job requires.
The excuse that he is trying to defend himself against the "politics of envy" is just the guilt of the inadequate aristocrat-wannabee who feels guilty about how little he actually does to deserve his way of life. He transforms his guilt into aggressiveness when it looks like he will be exposed.
December 26, 2007 7:04 AM | Reply | Permalink
I once invested in the stock market, no more.
Privately held companies can function also,
and more economically due to the fact that
they do not pay shareholder dividends...while
still providing goods and services at good prices, and decent wages for all involved.
For some, Wall St. is a wonderland, a financier's
playground, without thought or pause for
consequence, conveniently isolated from the
impact of the tremendous financial and political
influence that it wields, for others it's the
reason they have to sell their independent
businesses or break the law or move to other
countries to stay afloat.
Lots of money to be made, though, for the
discerning stock trader...and none of the guilt!
LOL
December 25, 2007 7:12 PM | Reply | Permalink
Dean,
You make a really important point as you point to Santa Claus on Wall Street. There is an ideological basis for this, as you point out.
The excuse the purveyors of the myth of the power of the free market claim is that the pay of management is established in the market, so it is automatically fair. As you accurately point out, the managers use their power of governance to control those who authorize their pay checks. Essentially the sellers control the buyers in the so-called economic transaction that sets their pay.Your quote emphasizes the way that the free-market ideologues carefully direct our attention to the fictional market and away from the power structures that make the market a fiction.
Market transactions create a paper trail of prices and changes of ownership. The exercise of power creates no such paper trail. So powerful individuals have a lunch with someone or call him, arrange to get his income increased (payoff for the sinecure of a position on the Board?)and they redistribute the money that rightfully belongs to the stockholders and investors to themselves.
The power is not visible. Look at how difficult it is in court to even show that a phone call occurred, let alone what was said. But, using the power, they structure the actual financial transactions to look like market transactions. The visible records all record what looks like the actions of buyers and sellers, when in fact the transaction was based on publicly invisible power structures.
Then the Free Market conservatives and Libertarians ignore the power transactions and spread the fiction that the markets of buyers and sellers did all the transactions and value creation by themselves with no outside interference. It's a propaganda exercise in which the "discipline" of Economics acts as the political think tanks for the free market bankers and top business managers who are using their positions of power to rip off everyone around them.
It's a propaganda exercise that is based on the ease of obtaining economic and financial data and the extreme difficulty of obtaining reliable and accurately descriptive data on power and its effects on the transactions.
December 26, 2007 6:40 AM | Reply | Permalink
Banks have been given special treatment since the Great Depression. They have special laws that protect them, tax breaks, etc. The reason is because Banks, historically, were locally owned and they held the local people's savings. They probably needed special considerations. About 20 years ago, the wealthy started buying up the banks. They are now huge conglomerates owned by the extremely wealthy. They do not need, or deserve, the special laws anymore.
December 26, 2007 3:56 PM | Reply | Permalink
I'm not strictly sure that is true. Keep in mind that because of the fractional reserve system, banks can literally create money by making loans for which they have only partial reserves to cover.
I don't know what the current reserve requirements are, but if the bank has to have a 20% reserve, each bank can lend out $500 for each $100 of assets they have. Then the borrower can deposit that loan to another bank, and the second bank can lend $2500 on the $500 of deposits.
A major reason why the Great Depression lasted as long as it did was that so many banks failed. Each time a bank failed, all the bank-created money that bank was responsible for disappeared. The result was that a large part of the American money supply disappeared as the banks failed. The federal insurance on deposits prevent some of that for small accounts (under $100,000) but for large accounts that was why the federal government was selling the loans held by failing savings and Loans during the S&L crisis.
Because of the critical role banks have in creating and maintaining the money supply, they have to have special laws that protect deposits and regulations that ensure that the banks don't lend more than the established fractional reserve. Without that regulation, a bank could open up and start lending before it had any deposits at all. Such a bank would, of course, be very likely to fail, but there are people who would plan the Ponzi game and get out just before the bank collapsed.
The large conglomerates provide some protection against this, but there are still a lot of banks and funds that are considered "too big to fail" because of the damage their failure would do to the economy, so that the Treasury department and the Federal reserve bail those banks and funds out when they get into trouble.
December 27, 2007 3:19 PM | Reply | Permalink
Can I correct one point in your post... this should read:
"have been forced to eat billions of dollars in write-downs on the complex financial instrumentals they had not peddled to their customers."
That is one of the unwritten stories so far about the credit crunch, about how disastrously securities firms deviated from their traditional originate-and-distribute business model. [The error was not however ahistorical, several firms (including Goldman) made similarly poor decisions during the dotcom haze.] This is the question shareholders should be asking, no firm as far as I can tell has explained satisfactorily why they held such huge slugs of asset-backed product, why these had not been syndicated as would routinely follow any new securities issue.
But this is a side point, I want to comment mainly about Wall Street bonuses. I would start out by saying that the tax loopholes used and abused by the highest paid Streeters are inexcusable, and Congress can't reintroduce some fairness into the tax system soon enough. But none of this changes what I write below.
The attraction of Wall Street is the salary, and don't let anyone tell you otherwise. But there are peculiar factors at work around determining bonuses which is why the headline numbers never tell the full story.
The first thing about bonuses is that they are as much about a Streeter's ego than the accumulation of wealth. Case in point, I worked in a firm where bonuses were awarded and then disbursed 2-3 weeks later. You had to stay the extra fortnight in order to receive your bonus... One trader I knew was awarded a 4 million bonus. Walked out of the firm that day. Gave up the bonus because it was an insult to his ability.
Related to this point about the bonus as a status symbol is that the bonus is paid by the firms tactically in order for them to retain their best producers (and drive out the least productive). And the reason why Street bonuses are little changed - or slightly up from 2006 (depending on the firm) - is because these firms are still trying to retain who they regard as their best employees.
Next, for many Streeters, especially those recently hired into a new firm, a large proportion of their bonus will be guaranteed. So even in slower years, the bonus pool is not going to be markedly changed unless you have widescale redundancies.
Finally, and I think this is the most important reason why bonuses still seem inconveivably high is as follows - most of the divisions of every investment bank have had very strong if not record-breaking years. Equities businesses have revelled in the volatility, vanilla fixed income businesses have thrived with record-breaking trading volumes, and the large M&A deals ensured months back that the star bankers would take home 7 and 8 figure bonuses.
The asset-backed financing and structured credit businesses - which have incurred the subprime losses - are a very small component of each of the firms. (The fact relatively small groups managed to run up such astonishing losses is an indictment of the management at these firms, and explains why three of them so far have seen high profile management casualties.)
Pulling this all together, the gross figures on Wall Street's apparent continued largesse towards its employees is not particularly surprising. But what you will find is that there are huge differentials internally. On the most extreme end, the regular leaks emanating from Merrill suggest that some of their fixed income managers will be getting close to zero bonus. Part of the reasoning behind this decision is that these people will have nowhere else to go...
I'm not here to justify the vast salaries paid to Streeters, nor the eye-popping bonuses that make up the bulk of their take-home pay. But what might appear to you as weird economics has some fairly Darwinian characteristics to it - when the Wall Street citadels like you, there is no extra dollar they won't pay to keep you. When they don't, they will pay you nothing beyond what they are contractually obliged to.
Oh yeah. One other point... most of these folks are paid mainly in stock, which generally gets vested in subsequent years and not immediately. So the equities salesperson at Citi who got paid 200k in Citi stock this time last year is not only in a funk about this year's bonus, he's also wondering where last year's bonus went.
None of this is, of course, a widows and orphans story. But Santa Claus has not visited everyone of Wall Street this year; on the contrary, Von Clausewitz is doing the rounds as people in the business wonder who will be in a job come the end of next year.
December 27, 2007 7:15 AM | Reply | Permalink
One other point... most of these folks are paid mainly in stock . . . .
And a good point it is.
Another change this year: 70 percent or more of bonuses will be stock grants instead of cash, up from 50 percent in a typical year, said Michael Karp, Options Group's CEO. Bloomberg.com 11/18/2007
December 27, 2007 7:30 AM | Reply | Permalink