The Problem is Not Executive Compensation or Greed
During the auto bailout thread, JohnW1141 made the point that my discussion was focusing on "Wall Street" and "corporations" instead of the executives. As he argues, "Wall Street, Corporations, Banks, etc. are abstract words that I think most of the public rarely connects to the people that run these entities. AIG didn't rip the public off, the executives at AIG did."
I think this is actually wrong and reduces the problem just to "bad apples." Greedy executives do what greedy executives are structurally allowed to do and in fact are rewarded for doing. Almost all of what those who perpetuated the financial meltdown did was completely legal so to argue that it's the fault of those being paid to do their jobs, rather than the system that enabled them seems to miss the point.
As I argued in comments, the reality was that much of the harm was done by eminently intelligent people who believed in their hearts that unfettered, unregulated markets would create the greatest wealth for the greatest number of people. Yes, they believed they would themselves get and deserve a disproportionate share of the wealth generated, but a lot of people backed them in that belief, economically and politically.
This was a failure not of a few bad apples but of an ideology and an economic system. So yes, it is "Wall Street" and "corporations" as abstract components of an ideology-driven economic system that failed, not just a few bad individuals.
What we need is not more ethical business leaders but a fundamentally different system of managing businesses in our economy. The real debate will come now.
On one hand, many will hold that all we need is to restore a bit more vigilance in regulation, but the basic wealthy-shareholder dominance of fundamental economic decision-making in the economy should continue once we've cleaned up the present mess.
The alternative is the more radical position that the lack of democracy in economic decision-making lies at the heart of what went wrong and that any long-term solution requires institutionalizing more democratic voice in decision-making-- which thereby specifically blames the modern structure of corporations for the problems we face. Under U.S. corporate law, corporate decision-making is designed to, no required to ignore the long-term interests and concerns of their consumers, the environment and their workers whenever those other needs conflict with maximizing shareholder wealth. And it's that same corporate law that limits the legal liability of shareholders for damage caused by firms they own and thereby encourages them to maximize the risk to the public, workers and the environment.
Merely increasing regulation on the same old corporate decision-making system is just asking for smart executives to revive a cat-and-mouse game where they seek loopholes to escape that regulation. A longer-term solution is to require those executives to serve not just shareholder interests, but those of the public, their employees and other stakeholders as appropriate. There are a whole range of approaches to accomplishing this kind of goals-- some we use already: non-profit businesses such as hospitals are one example; municipal-run utilities are another; employee-owned businesses exist as well. Countries like Germany have long required that corporate boards include employee representatives and many countries retain a government equity stake in many firms to make sure the public retains a voice in decision-making.
In a sense, various forms and varieties of public ownership of corporations is a variant on regulation more generally, since it creates different kinds of accountability depending on the approach. But one lesson we've had is that traditional regulation, where the government plays an adversarial role of trying to stop companies from doing what their owners want them to do has serious flaws. So instead of just changing the regulatory structure, we should be talking as well about changing the structure of how economic companies are owned and therefore how executives are chosen and rewarded in the first place.
So don't blame the greedy executives. Blame the corporate ownership system that chose the goals for which those executives would be rewarded.
While you are correct in asserting US corporate law requires tactical rather than strategic planning, I believe the implosion of Enron, and Wall St. to be the same. That is traceable to greed and lack of an ethical compass, pure and simple. These personality traits exacerbated both the fleecing of California citizens on electric and natural gas prices, and home owners, stock holders, employees and tax payers in the Wall St. and TARP fiasco.
While changing the law is needed, and quickly (it will not happen), the type of person these jobs attract will continue to be, in my mind, the same type that gravitates to the Mafia.
December 23, 2008 12:56 PM | Reply | Permalink
If what executives do is illegal, however, both the corporation and the executives must be punished. Enron is one example. Another that comes to mind is the political slush fund operated years ago by Duke Power (now Duke Energy) here. The corp was fined, but some executives also should have gone to prison.
December 23, 2008 1:08 PM | Reply | Permalink
"...we should be talking as well about changing the structure of how economic companies are owned..."
Wow, so not going to happen, but it's a happy thought.
December 23, 2008 1:09 PM | Reply | Permalink
It's a constant and consistent observation that when farmers are required to hand over their efforts to the state, it will be a pittance compared to the results of privatizing effort. Would anyone care to address why that might be? Hmmmm?
Meanwhile back at the banks, they are the most heavily regulated industry in the world. The system is fine, the regulators are the weak link.
And lastly, have any of you critics actually run a successful business, or is this just more intellectual fantasizing that the world will just mold itself to "reason" without unintended consequences?
December 23, 2008 1:38 PM | Reply | Permalink
shooter says:
This sounds strangely familiar....hey, I got it;
"US Corporatins are the most heavily taxed companies in the world!"
Something tells me there's some dissembling going on here.
December 23, 2008 1:51 PM | Reply | Permalink
Absence of enforcement does not equate to lack of regulation. That said, I'm sure the Japanese would smile at Shooter's hyperbole. I don't, however, agree that the taxation shiboleth is analogous to Shooter's comment about regulation of the financial markets. The one is utter BS after write off's and exemptions. The other is factual, albeit with an inch or two of dust collecting.
December 23, 2008 7:03 PM | Reply | Permalink
nonsense.
December 23, 2008 2:16 PM | Reply | Permalink
yes.
this has been another installment of short answers to stupid questions.
December 23, 2008 2:21 PM | Reply | Permalink
Yes, actually, I have run a business.
And you are the typical GOP ideologue. You rant ad nauseum with an inference of blame to the government where there is none.
"Responsibility" is also known as ethics. You know, that thing they used to teach on the way to the MBA?
It's sickening that ripping-off the taxpayer is now seen as an unavoidable side-effect of regulation.
It's called FRAUD. When you don't uphold your fiduciary obligations, and CHOOSE to steal short and LIE LONG, it's FRAUD.
I guess if I decide to spend $100,000 on my credit cards, and then quit my job and declare bankruptcy; it's not fraud, it's an unavoidable effect of bad government regulation.
Bullshit.
December 23, 2008 5:38 PM | Reply | Permalink
I hope you don't think I'm advocating fraud. OTOH if you want to get Government involved with business, it's safe to say tax money will be used to prop up said businesses, and it's also likely that production will take a back seat to employee benefits.
GM is called a healthcare and retirement system that makes cars on the side, for good reason. California is bankrupt for exactly the same reason.
Meanwhile I think Dodd's sweetheart mortgage deal, Frank's avoidance of throttling back Fannie and Freddie, along with Cox's somnambulism at the SEC, say quite bit in my favor.
Lastly, self-interest isn't greed, and should be differentiated. Self-interest is why you have the job you do along with the desire to maximize your salary. Would you call that greed? I wouldn't. In fact let me leave you with the aphorism that asks if someone wanting to keep more of his earnings, is greedier than the person that covets those earnings for himself.
I'm thinking you're in the latter category.
December 23, 2008 6:24 PM | Reply | Permalink
shooter says;
shooter, who covets your earnings for themselves?
Not I, nor, I believe, does anyone else here.
Does the Government covet your earnings when they tax you to build the roads you use, or when they supply you with police, fire protection?
Does the government covet your wages when they tax you and others to cover 'all' with unemployment compensation and those in need with Medicaid?
Does the government covet your wages when they institute programs available to you if you find yourself and your family down on your luck?
I guess if you ever hit the skids for some reason you'll stand on the corner selling apples to support yourself and your family rather than go to the Government for help.
December 23, 2008 6:58 PM | Reply | Permalink
December 23, 2008 7:26 PM | Reply | Permalink
shooter says;
In the same way you want to control where my money goes when you demand Government services of one kind or another.
There, I matched superficiality for superficiality.
December 23, 2008 8:07 PM | Reply | Permalink
Except that I'm not the one that complains someone else isn't paying enough. That would be you.
December 23, 2008 8:16 PM | Reply | Permalink
shooter,
that's a fallacy.
December 24, 2008 1:06 PM | Reply | Permalink
The dialectical dirty-dancing continues down in the filthy prison housing max-flatworlder believers in ideoillogical alt.truisms, who committed themselves to trials by fire, in which they were their own prosecutors, judges and juries, that after determined inconsiderations of the nonfactual, returned verdicts of guilt and self-sentences of life +1 day within the surrealistic model of society condensed down to a bipolar polity.
You intimate that you're standing on the high-ground defending free-market truth against a mortal attack, but you're blind, deaf and dumb as is your enemy, insensate from the very same affliction: buried six feet under a dung heap of antiquated hubris.
Mr. Newman's assertion that deregulation of markets caused the current financial problems is false. It was legislating as lawful, transactional non-transparency, and elected politicians' derelict in the performance of essential government functions in a free-market society: vigorous prosecution of fraud, collusion, and other criminal activities that impair open-markets. Republicans have become insider traitors, who in 1992, engaged in a collectivist conspiracy to take a contact out on America. Markets indicators were dishonestly inflated with a poisonous injection of duplicitous statistics from the juice derived in Three Card Monty games on the trading floors of emergent the fictional financial instruments commodities exchange.
Both left and right sling muddy lies. Free-market principles had nothing to do with any of this. There can be no Free-Market in a rigged system that allows a perpetual grant to equity skimmed form the real value of other people's work production.
December 23, 2008 6:33 PM | Reply | Permalink
Pseudo,
great post...I think.
I'm an old man and I have yet to see 'free trade' or 'free markets'.
All I've seen in my life is managed trade and manipulated markets, especially in raw materials.
December 23, 2008 7:13 PM | Reply | Permalink
But there is 'free trade' and 'free markets' John...I heard it can be found either in the vacuum of a perfect world or on the Continent of Atlantis. Or at least rumor has it... ;-)
December 23, 2008 11:49 PM | Reply | Permalink
lib,,
:-) :-)
Merry Christmas
December 24, 2008 9:17 AM | Reply | Permalink
But was not greed the driving force behind each of the incremental decisions that created the corporate ownership system that chose the goals for which those executives would be rewarded?
December 23, 2008 2:09 PM | Reply | Permalink
In fact, many thinkers with a lot of contempt for personal greed have seen harnessing that greed as a useful goal. There are many people of good will and intelligence who believed that limited liability, combined with certain kinds of shareholder responsbility, was a good way to create a strong economy.
Being in favor of corporate capitalism doesn't require being greedy oneself, even if many greedy people support the system for their own self-interest. Those benefitting from the present corporate system did have to convince a bunch of other people that the system would benefit society as a whole, not just the wealthy themselves.
Part of that argument has always been that whenever fraud, economic collapse or failure happens, that failure is attributed to a few greedy individuals with the promise that all that is needed is a new class of business leaders, and everything will be okay.
Blaming greedy people for problems we face actually serve those who want to preserve the status quo, since moral failings don't require structural change. But if the problem is a core design problem, then hoping for less greedy business leaders isn't a credible solution.
December 23, 2008 2:23 PM | Reply | Permalink
Apples and oranges anyone?
There were both bad apples and bad oranges (and more):
Individual greed without conscience, whether overtly criminal or not, is one problem. There are indications that there may have been a problem at Citi, for instance where two close friends were involved in a monitoring relationship at the heart of Citi's troubles.
Corporations who screw over their customers or employees will not prosper indefinitely.
Cox at SEC allowed problems to be amplified via overleveraging AND monitoring of poor to none. That has to be considered a "bad fruit" instance.
"eminently intelligent people who believed in their hearts" -- is a whole class of delusional fruit.
"the lack of democracy in economic decision-making lies at the heart of what went wrong" --
One person one vote. One share one vote. What Nathan says following this is something else entirely unrelated to democracy.
The problem is that one can identify many different problems in the salad. Proposing an orange solution to the apple component won't work.
December 23, 2008 2:14 PM | Reply | Permalink
"One share, one vote" is quite different from "one person, one vote" -- since shares in our society are restricted to a tiny minority of the population, with less than the top 1% exercising all voting control over corporate decision-making.
So "one share, one vote" means one percent of the population making all corporate decisions on behalf of the other 99% of the population. Which seems like exactly the crux of the debate over who corporations should be accountable to-- just their shareholders or the broader "one person, one vote" population.
December 23, 2008 2:30 PM | Reply | Permalink
But Nathan, that's my point about "democracy" as you used it. And of course shares are not restricted that way at all. Voting power in corporations is clearly concentrated in the hands of the few who own many shares. But individual shareholders can still speak at shareholder meetings.
The problem is that casting the situation as a lack of democracy is fallacious.
December 23, 2008 3:23 PM | Reply | Permalink
no. what nathan says after that is completely unheard of in american democracy but an integral part of many other industrialized democracies. and those other democracies are recognizable by their much more equitable distribution of wealth/income.
December 23, 2008 2:27 PM | Reply | Permalink
You need to explain the connection. It still looks totally unrelated to democracy or lack of democracy.
December 23, 2008 3:26 PM | Reply | Permalink
Nathan,
yep, all that the greedy executives did was perhaps legal, but how did it get to be legal?
It was these executives who purchased the likes of Phil Gramm, Dick Armey, and most of the rest of the Republican party, along with the likes of Chris Dodd, Chuck Schumer, Bill Clinton and most of the modern day Democratic leadership.
You claim what these executives did was structurally legal.
Shuffling paper around regardless of the worth of the paper just to make a profit and a bonus is structurally legal?
Loading compensation committees with executives from other companies on who's compensation committee you sit is structurally legal?
Hedge Fund managers earning up to hundreds of millions of dollars pay a tax rate of 15%, Joe Lunchpail earning 45k pays 28%.
Billions in taxes are avoided by offshore mail drops.
Crap like this is structurally legal?
Things like this exist, and may be structurally legal, because the boys in the corporate boardrooms bought your Government.
And I don't insinuate its just "bad apples", I charge that most publicly traded companies/corporations today are replete with bad apples, bad apples who own your Government.
Here's a partial record of just one who was bought by the bad apples, Chuck Schumer;
http://www.nytimes.com/interactive/2008/12/12/business/20081214-schumer-table.html
People like Schumer are supposed to be the opposition, not the enablers.
When you see things as structurally legal you're seeing the symptoms. I see the root, a Democratic Party that got in bed with the Republicans and the sharks in the business world.
In the words of that giant of morality and good government, ex Congressman Ozzie Meyers; "Money talks and bullshit walks."
December 23, 2008 2:36 PM | Reply | Permalink
As usual John, you wrote with great clarity and accuracy. My personal take on the current state of the economy is that, just as communism was exposed as an utter failure by the collapse of the communist nations, capitalism has now been equally exposed as an utter failure by the economic near collapse we are now experiencing.
It is time to move on and join the more advanced nations in the world, by embracing a mix of socialism and capitalism, to take advantages of the strengths of both for the nation's citizens, without most of the weaknesses of both. A very good starting point would be universal single payer health care. Another would be drastic new government regulations on who can serve on a corporate board, and how they are required to exercise due diligence.
December 25, 2008 10:23 PM | Reply | Permalink
Thank you for broaching the subject but there are many inherent problems with today's corporate-capitalist system. As a former practicing Exec Recruiter at a senior level (there are few fees available now), I fully comprehend the personal self-interest quotient senior corporate executives possess as an embodiment of culture and training. I also understand the fact that they basically seek to be unaccountable for their action and seek to make immune their compensation returns from the actual performance. But there is much more, they truly are inattentive to external social responsibility issues outside their own worldviews or direct market pressures. Their sole aim are business concerns, market position, profitability, revenues are essentially the keys.
Now to me the problem begins with some failed ideologies; A) Corporation are artificial persons. Thus is plain BS---they are not persons, nor liable for criminal conduct or voting rights and so a corporation should have no standing in court simply because a group of profit only investors congregate and license this organization to seek riches. The problem with artificial persons is that they seek to hold things like freedom of speech, fairness doctrine et cetera....
The second is that corporations inherently seek to use public or common good resources for their own personal gain without accountability.
The third is that they seek to be non-national. This I sum up as a corpotacracy that has emerged as a modern form of nobility.
Shareholders (public) have little actual ownership accountability or power so they merely look at their ownership stake as direct returns on equity or dividends. Executives or decision makers also do not seek long term returns but short term or immediate and even manipulated returns on equity and compensation.
The situation is is the purpose of commerce simply more commerce? As the 21st Century unfolds this mantra will be challenged for commerce for the sake of commerce is unsustainable and foiling our living environment because the true costs of commerce is not captured in the transactions.
Is say begin breaking down the legal veil protections and begin capturing the true costs of transactions and a new mantra will emerge.
Example; a fast food product of $1.00 is heavily subsidized by the government by not capturing all the related costs of that transaction. What was the cost to society of the unhealthy food product, the waste cost of the corp farming, the cost to society of the manufacture and distribute its packaging, its collection of refuge, its cost of defiling the environment, the cost of the carbon footprint to the entire transaction, even the cost of subsidizing the local development of the business.
That dollar transaction suddenly multiplies ten even hundred times the actual dollar.
December 23, 2008 2:44 PM | Reply | Permalink
RWN,
thanks for the dose of reality.
December 23, 2008 3:11 PM | Reply | Permalink
Thank you for remembering the artifice of corporations as people. Getting rid of that artifice alone would do worlds of good. Add to that a prohibition of interference with the political process by anyone not entitled to vote in that process, and much more good would be done.
December 25, 2008 10:28 PM | Reply | Permalink
Nathan, you mention structures allowing executives to do wrong. What we're seeing is a lack of individual character at the top; poor leadership by example; and greed.
People are masters at adapting to and using structures, no matter which, to their advantage. Whether government or corporate corruption, such is the abuse of systems rooted in bad character.
And bad character is a parenting, ethical, spiritual and religious issue. All of the things that liberal want to reinvent and rightists want to put in service of politics and business interests.
December 23, 2008 3:14 PM | Reply | Permalink
Interesting discussion. I fear that individuals can hide too easily behind their corporate facade or the groupthink of corp. buraucracy, though, when explaining away their wrongdoing.
Bernie Madoff has blood on his hands (given the directly related suicide announced today); not "Madoff Hedge Fund LP" or (whatever his racket was called).
Bernie must pay in jail for a long, long time. Hard time. Not Martha Stewart jail. But Pink jumpsuits and chaingangs just like under Sherriff Joe Arapaio.
December 23, 2008 3:22 PM | Reply | Permalink
In short, yeah, let's reinvent the whole corporate way of life.
But in the meantime, let's prosecute, liquidate, humiliate, and throw away the key to Bernie's cell (same goes for all other similar "evildoers"). And clawbacks. I want clawbacks. Liquidate the wife's assets and all TEN of his houses. Not just half so the wife and kids get to continue living off the malfeasance.
December 23, 2008 3:25 PM | Reply | Permalink
Yeah, anyone remember that movie, Papillon?
The Dustin Hoffman character had been sent to Devil's Island for being involved in a massive financial swindle. Does anyone see the Captain Hazeltons who were at the helms of these run-aground financial houses getting shipped off to Gitmo? No, times have changed, and now we give out golden parachutes for this conduct.
December 25, 2008 9:03 PM | Reply | Permalink
I think you are half way there. Yes, there is a need for other stakeholders to have some say in how firms are managed, there is also a need to allow for management to be chosen in a more "democratic" way.
The other half has to do with the goals of for-profit firms. As long as we adhere to the present model where firms obtain capital and then use this to generate a "profit" which is then used to pay back the capitalists more than they invested we have the necessity for continual growth. Any firm which stops growing loses the ability to attract new funds. The only time this may work is in the case of publicly regulated monopolies (like the old AT&T) where the rate of return is guaranteed. Then one gets the "widows and orphans" to invest who are interested in a fixed rate of return, not stock appreciation.
We (the planet) are rapidly reaching the point where we can no longer ignore the externalities of resource depletion and waste disposal when generating "profits" and the promise of unlimited new sources of raw materials.
When this is understood the standard capitalist model ceases to work and needs to be replaced by something else. Better governance isn't sufficient. Notice how charities and government agencies (like public retirement funds) have lost their prudence and invested in firms which promised high returns instead of adhering to the prudent investor standard. In most cases those making these investment decisions didn't stand to gain personally from this, they are public servants and/or heads of non-profits, but they see the only game in town as competing with for-profit firms for the maximum return.
We need to devise a new system which admits that the world is a finite place and where growth is replaced by improvements in quality, not quantity.
See my web site for several detailed discussions on this general problem, if you are interested.
December 23, 2008 3:31 PM | Reply | Permalink
"Stock appreciation" is a misnomer invented to help fleece investors. A piece of paper does not "appreciate" in value. The whole concept that drives today's stock market is much more kin to casinos than to genuine investing. Just look at the "dot com" bubble, where the vast majority of the "corporations" that had their shares bid up in value never did produce anything of value except their shares of stock. It was simply a case of everyone buying a piece of paper, confident that they would soon find someone more stupid than them who would pay them more for it than it cost them to buy. The housing bubble was a similar casino game. Housing prices became completely separated from actual value of the properties, and relied only on the knowledge that there is always someone more stupid who will pay more for that property than you did. Appreciation entered into to it only as appreciation for the presence of so many people more stupid than me.
December 25, 2008 10:36 PM | Reply | Permalink
Having been a securities regulator in the past, we probably do not need much more regulation, but more vigorous enforcement of what regulations we have.
Corporate Executives and Boards that are permitting ungodly amounts in compensation to executives are at that juncture operating the corporation for the benefit of themselves and to the detriment of its shareholders (Heck, Mutual Insurance companies don't even have to worry about shareholders/policyholders).
Of course, in an ideal world, the shareholders' interest and the public interest is wholely mutual.
We seem to have a bunch of folks abusing the corporate structure these days.
December 23, 2008 3:39 PM | Reply | Permalink
December 23, 2008 4:11 PM | Reply | Permalink
How is that even connected? In fact, most Silicon Valley firms think empowering employees is a big part of their success-- and the failure of most US companies to do so is why you picked such a tiny part of US industry.
And while the items you mention are innovative, they are hardly enough to build an economy on. And the reality is that countries like Germany have managed to keep on to well-paying, innovative manufacturing jobs across sectors. "German engineering" is a watchword for innovation and skill continuing promoted at German companies, while the assumption is that the only innovation coming out of U.S. is out of a basement somewhere.
December 23, 2008 5:08 PM | Reply | Permalink
December 23, 2008 5:25 PM | Reply | Permalink
A simple 1:1 numerical comparison between unemployment rates in America and Germany has no value for use as an honest statistic, because different criteria are used for the classification. The US uses a more exclusive definition, which tends to understate the number of unemployed.
December 24, 2008 2:19 AM | Reply | Permalink
Whatchu talkin' about Willis? I'm pretty sure corporate boards didn't invent the iPod, iPhone, Google, Facebook and/or Youtube, and/or anything else...
Also, I'm pretty sure Bavarian Motor Works makes some fine products still despite any "government equity stake" or an average joe sitting in on their gripping board meetings.
December 23, 2008 5:14 PM | Reply | Permalink
Corporate boards and very rich people took a risk and gave money to Google, Facebook, Apple and many other startups.
December 23, 2008 8:16 PM | Reply | Permalink
Nonsense.
If the goal is a competitive economy, look at the Irish economy. They are wildly socialistic and regulatory compared to the U.S., and yet have a PCGDP and standard of living that meets or exceeds ours in the last decade.
BTW, Phil Gramm is the biggest criminal in the history of the U.S.
He alone deserves the biggest share of the blame for this economic mess.
I know the GOP bobbleheads will disagree, but that's because they're illiterate and choose to believe in fantasy instead of reality. (faux new)
December 23, 2008 5:51 PM | Reply | Permalink
Really, What's their tax rate?
BTW, Phil Gramm and Lawrence Summers , Obama’s top economic adviser, are the biggest criminal in the history of the U.S.
December 23, 2008 6:18 PM | Reply | Permalink
"But Ma, BillyJeff did it first!"
Divinely righteous little repeat-a-cons,
inherently endowed with inestimable competence,
perfected this lesson learned from the past;
thus proving irrefutably:
That Democrats Are The Lamer Of Two Evils.
December 24, 2008 8:04 PM | Reply | Permalink
So how come Germany has BMW and we're stuck with the bankrupt three?
December 23, 2008 8:43 PM | Reply | Permalink
Why does it matter? What's the unemployment rate in US and Germany today?
In 2007 6½-year low was 8.8%.
http://www.businessweek.com/globalbiz/content/jun2007/gb20070629_910899.htm?link_position=link16
Their best rates are worse than our worst.
December 23, 2008 9:16 PM | Reply | Permalink
Why does it matter? Because bankrupt companies tend not to have a great effect on the unemployment rate. Am I missing something?
December 25, 2008 9:07 PM | Reply | Permalink
the harm was done by eminently intelligent people who believed in their hearts that unfettered, unregulated markets would create the greatest wealth for the greatest number of people. Yes, they believed they would themselves get and deserve a disproportionate share of the wealth generated
Perhaps the only truth Newman states is 'they believed they would get...a disproportionate share of wealth".
Penalties are needed for the outright fraud that permeated the financial system and that caused this crash.
We could also use a government and Fed not totally beholden to the financial industry. Real change on this issue would mean federal prosecutions to send lots of these folks to prison. Even the 'eminently intelligent' can have their wits sharpened by such action.
December 23, 2008 6:01 PM | Reply | Permalink
December 23, 2008 6:27 PM | Reply | Permalink
Just the 'homeowners' who work for firms that profited both from doling out other people's money by writing/bundling/rating and insuring the bad loans/CDOs and got billions of federal bailout money when it all imploded.
December 23, 2008 6:55 PM | Reply | Permalink
shooter,
The fraud was committed by the one that sold the mortgages to unqualified buyers and by all those that bundled the bad loans. But of course, these cretins weren't coveting your earnings like the poor were.
Your view of the world is accomplished by looking through the large end of a funnel and seeing what the small end shows you. Maybe you want to reply to the article below.
http://www.usnews.com/blogs/the-home-front/2008/12/17/sheila-bair-stop-blaming-the-community-reinvestment-act.html
December 23, 2008 7:05 PM | Reply | Permalink
If the only problem was home buyers who bit off more than they could chew, then the banks could just resell the homes shooter, DUH!
The problem was our financial/real estate industry milked this mortgage/housing bubble golden goose for all they could, selling $500,000 homes to strawberry pickers in California for example, then they pocketed the fees, and ran to the government when their firms, their banks, and our banking system itself collapsed.
December 23, 2008 8:09 PM | Reply | Permalink
I think that the "it's the structures" argument is necessary but not sufficient to avoid putting people in jail. There's something wrong when it can be invoked to keep the people who invented and pushed no-doc mortgages safe and happy in their paid-for homes, but drug dealers and petty criminals all around the country who faced a similar choice between law/ethics and personal enrichment end up doing hard time.
December 23, 2008 8:07 PM | Reply | Permalink
Jailing bad actors is necessary and appropriate when they've broken the law, but it won't solve the problem because the current "structure" so strongly encourages the bad acts. It's not either-or, it's got to be both.
December 25, 2008 9:18 PM | Reply | Permalink
Let's not take Nathan too seriously.
It's winter and he's suffering from "organizing fatigue" -- not to mention frostbitten toes from having to sign up workers at the company gate at seven in the morning. So much easier to champion workers' interests in the comfort of a well-heated boardroom -- but how to get a key to that equally well-guarded demesne?
By changing the law of corporations!
Reminds me of civil rights advocates who were happier relying on the good will of the Supreme Court than upon marches and voter registration drives.
December 23, 2008 8:27 PM | Reply | Permalink
Just an odd response (especially about someone who is completely against leftists depending on the courts for constitutional change). But even aside from that, talking about the need for more than cosmetic changes in who runs corporations -- getting rid of the "bad apples" -- in favor of radical economic change in those institutions is exactly what many of those marching in those civil rights marches were also calling for.
Worth remembering that the 1963 march was not just about civil rights-- it was officially the "March on Washington for Jobs and Freedom." Oh yeah, and there was a reason Martin Luther King Jr. was accused of being a Communist; not that he was a member, but he talked about serious socialistic changes in the economy as needed to attain justice.
Marching was a tactic, not the goal.
December 24, 2008 12:46 AM | Reply | Permalink
Nathan - it is frustrating that you stick to such abstract concepts. Would be helpful if you got down to specifics. I disagree with you because I believe that successful (and therefore surviving corporations) do more than just serve shareholders. They realize that they need to serve their customers and that customers come first.
December 23, 2008 9:56 PM | Reply | Permalink
Give an example of a company that served there customers at the expense of their shareholders? Many companies may recognize that pleasing customers is a useful means to increasing sales and therefore profits, but when they come into conflict, the needs of shareholders inevitably win out. Google may suddenly creepily abuse customer privacy or Starbucks will remove comfy chairs to increase turnover or a restaurant will lower food portion size to save money. None of it is done for evil reasons necessarily (which is my point) but the interests being served are ultimately shareholder interests, not customer interests.
December 24, 2008 12:51 AM | Reply | Permalink
It's not as black and white as you want to make it out to be. My point is that companies to be successful need to focus on product innovation otherwise the consumer won't buy their product.
JetBlue was this way when they first started out. They were so much better from a customer service perspective than any other airline. They instantly grew market share and stole loyal customers from the older carriers (JetBlue eventually tried to grow too quickly which hurt them but that's another story)
Southwest Airlines was a similar story.
I think Hertz also is an example of a company that (although not perfect) really strives to make the customer satisfied with their product.
Can I prove that they did this at the "expense" of shareholders? Of course not, but we don't need to prove that. The point is that these companies understand they need their top priority to be their customers. Their shareholders aren't the ones flying in their planes or renting their cars.
December 24, 2008 1:12 AM | Reply | Permalink
December 24, 2008 1:30 AM | Reply | Permalink
Nathan, I'm not sure public companies truly serve shareholder interests either. In the real world of corporate governance, the CEO and his executive team wields the vast majority of the power and, I fear, acts primarily in its own financial interest. Maximizing their own financial gain does require the management team to keep stock prices high in the short term, since that keeps the Board and shareholders complacent. But under the cover of Board and shareholder complacency, the management team can essentially rob the company blind through large salaries, exhorbitant bonuses, huge stock grants, and extravagant perquisites. Yes the system benefits shareholders in the short term and shareholders do put pressure on executives to provide high short-term returns. But the power is really in the hands of the executive team and that team is acting primarily in its own interest. Shareholders are, in some respects, actually too weak and executives too strong. Better corporate governance would actually shift power from executives back toward longer term shareholders. Right now, the power balance lies too heavily with the executives and, because of that, whenever the company acts it is acting primarily in the interest of the executives.
December 24, 2008 8:34 AM | Reply | Permalink
The corporation exists for the benefit of its managers.
In the New Industrial State (1967) John Kenneth Galbraith argued that shareholders had very little control over corporations, that managers obtain shareholder quiescence by ensuring acceptable returns and then, proceed to fund "pet projects" which are not in the interests of the shareholders.
Galbraith didn't think this fact necessarily led to bad outcomes. Managers' pet projects could include socially beneficial ones. It's the change to Gordon Gekkoism and investors' reliance on capital gains rather than ordinary dividends (the alignment of management compensation with short term share performance) which changed everything.
December 24, 2008 9:51 AM | Reply | Permalink
A very good point, Ellen. And linking executive pay to stock price appreciation (cap gains) via stock options has only exacerbated the problem.
December 24, 2008 10:05 AM | Reply | Permalink
This is why competition is a good thing. It channels self-interest into seeking benefit for the customer. That's how sales are made, from whence profits come, from whence taxes come. This is why I asked who had actually run a business. Ignorance of how commerce actually works is the rule these days rather than the reverse. Business is based on service, not dictates.
Don't believe me? You pick and choose among businesses all day, every day. The ones you choose have offer you something the other don't. The operative word is OFFER.
December 24, 2008 9:37 AM | Reply | Permalink
What if the injured persons (say victims of environmental pollution) are not the customers?
And what if firms have used political power (lobbying for legislation in their favor) to insulate themselves from paying these victims' claims?
ALITO: Legally it's over. Concannon was brilliant.
BISHOP BROPHY: Tell me about Kaitlin Costello.
ALITO: There's nothing to tell. It's been stricken from the record.
BISHOP BROPHY: I know. Did you believe her? The Verdict
December 24, 2008 11:05 AM | Reply | Permalink
What rhetoric-- consumer protection laws wouldn't be needed if businesses didn't regularly lie about what their products do, leave unknown toxic chemicals in them, and provide shoddy followup service. Sure, there are firms that thrive based on good consumer service, but that's just one strategy among many far less consumer-friendly strategies.
The subprime mortgage meltdown was all about companies serving their profits at the expense of the long-term interests of customers who found themselves burdened by balloon payments and all manner of interest rates adjustments that they hadn't anticipated.
There is a large realm of profit in exploiting consumer ignorance and many businesses take advantage of that profit opportunity. to argue otherwise is to be in complete denial.
December 24, 2008 11:06 AM | Reply | Permalink
There certainly are bad corporate actors out there and eventually they are discovered and put out of business. That isn't the case when it comes to governmental entities. Essentially you are making the perfect the enemy of the good. Having an economic system based on free choice and self-interest provides more and better choices for consumers. With Government you get paid for not growing crops, something you won't see in business unless you're an automaker required to have a "job bank".
December 25, 2008 9:27 AM | Reply | Permalink
Archer Daniels Midland engaged in price fixing of agricultural commodities. There's no question of that, there was an FBI mole at some of the actual meetings, and he was wearing a wire. I call that bad action, and ADM is definitely still in business.
If they've stopped, it's because they were caught by the cops. They clearly were acting against the interest of customers in order to increase their profits.
I suppose their corruption could have been unique in all the world, but I doubt it.
December 25, 2008 9:32 PM | Reply | Permalink
Sorry - one more thing - the real problem with the financial crisis is that none of the investment banks are private companies anymore. Prior to the 1970s, all the I-banks were partnerships and when the bankers are all partners it is a self-regulating risk management. When the Gods of the Universe are just receiving cash compensation and minimal shares, they will do risky things that they'd never do if the owned a real interest in the firm
December 23, 2008 10:04 PM | Reply | Permalink
Important point there.
December 23, 2008 10:47 PM | Reply | Permalink
Tom Wright - I wasn't sure if you're being facetious or serious?? (So many people on here blast me that I never know...)
December 23, 2008 11:09 PM | Reply | Permalink
Two separate issues.
Ethics. Assuming ad arguendo an ethical ceo formally he's working for the shareholders. So without breaking the law he should do whatever he can on behalf of the shareholders: for example if possible pay the employees starvation wages.
And with respect to concern for the public, read Alfred Sloan's My Years With General Motors in which he discusses dispationately that fact that GM could have reduced auto deaths by making safer cars but deliberately did not do so because on balance it made more money with the unsafe ones.
But in fact the assumption of an ethical ceo is close to being an oxymoron. Adam Smith of course proposed that self interest was so strong a motivator that society as a whole benefitted from allowing individuals to pursue that self interest. Which has certainly convinced most economists.And me.
But if you believe that self interest is that strong it's illogical to believe ceo's will lightly forgoe an action in their self interest because it's illegal. To my personal knowledge ,the various firms for which I worked over 40 years almost without exception : did dishonest accounting, paid bribes, and engaged in price fixing.
Although done on behalf of the firms I'd still characterize those ceo's actions as greed because ulimately the corporation's success became theirs.
a fundamentally different system
Control of business requires changing reality rather than changing laws
Providing employee safety , benefits , and wages is best achieved by empowering unions. As they haven't been since Taft Hartley. (Reread Galbraith's American Capitalism, the Concept of Counterveiling powers.) And coupling this with trade policies which prevent ceo's from outsourcing to low wage countries.
Or to choose a current issue. Green vehicles can't be achieved by CAFE standards nearly as well as by a variable sales tax on gas that prevents the price from dropping below,say, $4.00 a gallon.
Businesses respond to facts,not laws. Particularly if you accept the inference from my career that few-if any- ceo's are hesitant to break the law if they can get away with it.
December 23, 2008 11:46 PM | Reply | Permalink
I think we have to remember that executives who perpetuated this meltdown tried very hard to create an environment that permitted them to conduct the affairs of their respective companies in a way that really didn't serve their investors or the nation very well. They successfully lobbied their (our) representatives in congress over the years with the explicit goal of reducing the regulatory scheme that maintains marketplace controls and order. In that regard they have a great deal of responsibility for the meltdown. Had they not sought to compromise the regulatory scheme we may not have this mess.
You can say it is the system that caused this meltdown but in the end it is the people working the system who have produced the meltdown. Not the other way around.
December 24, 2008 12:11 AM | Reply | Permalink
One simple reform would be to require executives of public companies and financial service firms (both public or private) to hold any pay (including both cash and equity-based pay) in excess of say $1 million per year in escrow for 10 or so years after the pay was earned. In the event of the company's bankruptcy or malfeasance, damaged parties would have access to the executive's escrowed money. This would give executives an incentive to ensure the company remained healthy and honest for a longer term. Right now, executives can drive a company to bankruptcy and still walk away with millions (often hundreds of millions) of dollars. This isn't good for anybody--shareholders, employees, customers, or the public.
Another reform would be to require all companies with more than 100 or so employees-public or private--to have an independent Board of Directors and to require at least two employee seats on that board. Directors should have three responsibilities:
Evaluating and compensating company managers
Protecting shareholders' and owners' financial interests
Protecting the interests of employees, customers, and the public by ensuring the company acts legally and ethically
Directors should be paid a small cash stipend to cover their expenses and provide some modest compensation for their time, but should receive most of their reward in the form of a delayed payment that vests over time and, again, is forfeitable if the company goes bankrupt or loses a lawsuit for malfeasance of some sort.
December 24, 2008 7:32 AM | Reply | Permalink
"...did was completely legal so to argue that it's the fault of those being paid to do their jobs, rather than the system that enabled them seems to miss the point. "
Let's see, wasn't something like this going on in Germany not to long ago?
December 24, 2008 11:50 AM | Reply | Permalink
False dichotomy.
Plotocrats are horrendously greedy, taking exponentially more than the average worker. And they created the system.
Think on the fact that greed is the only problem that social scientists haven't studied. It's taken for granted as a good think at every level of society.
December 26, 2008 1:31 AM | Reply | Permalink