Wednesday, December 24, 2008
Idolizing the Rich
By Paul Krugman
Syndicated columnist
The Bernard Madoff story tells us a lot about the nation's financial mess
The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.
Yet surely I'm not the only person to ask the obvious question: How different, really, is Madoff's tale from the story of the investment industry as a whole?
The financial-services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's not just a matter of money: The vast riches achieved by those who managed other people's money have had a corrupting effect on our society as a whole.
Let's start with those paychecks. Last year, the average salary of employees in "securities, commodity contracts, and investments" was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.
But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
Consider the hypothetical example of a money manager who leverages up his clients' money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he'll keep those bonuses.
So, how different is what Wall Street in general did from the Madoff affair? Well, Madoff allegedly skipped a few steps, simply stealing his clients' money rather than collecting big fees while exposing investors to risks they didn't understand. And while Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same: the money managers got rich; the investors saw their money disappear.
We're talking about a lot of money here. In recent years, the finance sector accounted for 8 percent of America's GDP, up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we're talking about $400 billion a year in waste, fraud and abuse.
But the costs of America's Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street's ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven't closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Sen. Schumer), politicians have walked when money talked.
Meanwhile, how much has our nation's future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches being "earned" in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that "the financial system as a whole has become more resilient" — thanks to derivatives, no less? The answer, I believe, is that there's an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they're doing. After all, that's why so many people trusted Madoff.
Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we're looking at now are the consequences of a world gone Madoff.
I used to wonder where all the money went - Americans are more productive (read: work more than anybody else on the planet) than the rest of the world, but people are not getting ahead; they have been falling behind since the 70's! Now we all know who took the money and wasted it.
It used to infuriate me - my sense of fairness, that some people were getting so rich while others were barely making it... But nobody else seemed to care. Now everyone cares, but seems helpless to do much about it. We've all been fooled by the naked emperor.
--- T
Syndicated columnist
The Bernard Madoff story tells us a lot about the nation's financial mess
The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.
Yet surely I'm not the only person to ask the obvious question: How different, really, is Madoff's tale from the story of the investment industry as a whole?
The financial-services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's not just a matter of money: The vast riches achieved by those who managed other people's money have had a corrupting effect on our society as a whole.
Let's start with those paychecks. Last year, the average salary of employees in "securities, commodity contracts, and investments" was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.
But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
Consider the hypothetical example of a money manager who leverages up his clients' money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he'll keep those bonuses.
So, how different is what Wall Street in general did from the Madoff affair? Well, Madoff allegedly skipped a few steps, simply stealing his clients' money rather than collecting big fees while exposing investors to risks they didn't understand. And while Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same: the money managers got rich; the investors saw their money disappear.
We're talking about a lot of money here. In recent years, the finance sector accounted for 8 percent of America's GDP, up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we're talking about $400 billion a year in waste, fraud and abuse.
But the costs of America's Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street's ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven't closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Sen. Schumer), politicians have walked when money talked.
Meanwhile, how much has our nation's future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches being "earned" in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that "the financial system as a whole has become more resilient" — thanks to derivatives, no less? The answer, I believe, is that there's an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they're doing. After all, that's why so many people trusted Madoff.
Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we're looking at now are the consequences of a world gone Madoff.
Paul Krugman is a regular columnist for The New York Times.
I used to wonder where all the money went - Americans are more productive (read: work more than anybody else on the planet) than the rest of the world, but people are not getting ahead; they have been falling behind since the 70's! Now we all know who took the money and wasted it.
It used to infuriate me - my sense of fairness, that some people were getting so rich while others were barely making it... But nobody else seemed to care. Now everyone cares, but seems helpless to do much about it. We've all been fooled by the naked emperor.
--- T
Tuesday, December 23, 2008
Monday, December 22, 2008
Saturday, December 20, 2008
Talvimyrsky tulossa...
Meillä on ollut nyt jo kohta viikon verran epätavallisen kylmää ja talvista: pakkasta ja lunta. Ennenkin on tullut lunta, mutta se on ollut märkää ja sulanut miltei heti pois kun ilma on lämmennyt lumipyryn jälkeen. Nyt on erilaista; pakkasta on riittänyt päivällakin muutama aste, lumi narisee saappaiden alla ikään kuin Suomessa. Meidän kodit ei ole rakennettu kylmää varten, sisällä on koleaa vaikka kuinka lämpo on päällä. Olemme laittaneet pyyhkeitä ulko-ovien eteen jottei vetäisi niin kovasti, mutta tuntuu että kylmyys tulee suoraan seinistä sisään.
Tälle päivälle on luvattu vielä kovempi talvimyrsky: lumisadetta ainakin 20-30 senttiä lisää, jääatävää vesisadetta, yli 70 mailia tunnissa puhaltavia tuulenpuuskia jotka kaatavat puita ja katkovat sähkojä. Aamun lehdessä kehotettiin ihmisiä hakemaan kaupasta tarvikkeita sähkokatkojen varalle: vettä, ruokaa, pattereita. Jos kylmä jatkuu tällaisena sähkokatkos on kova paikka: miten pysyä lämpimänä?
--- T
Friday, December 19, 2008
Amy Goodman on the Financial Crisis
Posted on Dec 16, 2008
By Amy Goodman
The global financial crisis deepens, with more than 10 million in the U.S. out of work, according to the Department of Labor. Unemployment hit 6.7 percent in November. Add the 7.3 million “involuntary part-time workers,” who want to work full time but can’t find such a job. Jobless claims have reached a 26-year high, while 30 states reportedly face potential shortfalls in their unemployment-insurance pools. The stunning failure of regulators like the Securities and Exchange Commission was again highlighted, as former NASDAQ head Bernard Madoff (you got it, pronounced “made off") was arrested for allegedly running the world’s largest criminal pyramid scheme, with losses expected to be $50 billion, dwarfing those from the Enron scandal. The picture is grim—unless, that is, you are a corporate executive.
The $700-billion financial bailout package, TARP (Troubled Assets Relief Program), was supposed to mandate the elimination of exorbitant executive compensation and “golden parachutes.” As U.S. taxpayers pony up their hard-earned dollars, highflying executives and corporate boards are now considering whether to give themselves multimillion-dollar bonuses.
According to The Washington Post, the specific language in the TARP law that forbade such payouts was changed at the last minute, with a small but significant one-sentence edit made by the Bush administration. The Post reported, “The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction.”
Read the fine print. Of the TARP bailout funds to be disbursed, only those that were technically spent “in an auction” would carry limits on executive pay. But Treasury Secretary Henry Paulson and his former Goldman Sachs colleague Neel Kashkari (yes, pronounced “cash carry"), who is running the program, aren’t inclined to spend the funds in auctions. They prefer their Capital Purchase Program, handing over cash directly. Recall Paulson’s curriculum vitae: He began as a special assistant to John Ehrlichman in the Nixon White House and then went on to work for a quarter-century at Goldman Sachs, one of the largest recipients of bailout funds and chief competitor to Lehman Brothers, the firm that Paulson let fail.
The Government Accountability Office issued a report on TARP Dec. 10, expressing concerns about the lack of oversight of the companies receiving bailout funds. The report states that “without a strong oversight and monitoring function, Treasury’s ability to ensure an appropriate level of accountability and transparency will be limited.” The nonprofit news organization ProPublica has been tracking the bailout program, reporting details that remain shrouded by the Treasury Department. As of Tuesday, 202 institutions had obtained bailout funds totaling close to $250 billion.
House Speaker Nancy Pelosi said recently, “The Treasury Department’s implementation of the TARP is insufficiently transparent and is not accountable to American taxpayers.” Barney Frank, D-Mass., chair of the House Financial Services Committee, said earlier, “Use of these funds ... for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. ... is a violation of the terms of the act.”
Republican Sen. Charles Grassley of Iowa said of the loophole, “The flimsy executive-compensation restrictions in the original bill are now all but gone.” Put aside for the moment that these three all voted for the legislation. The law clearly needs to be corrected before additional funds are granted.
The sums these titans of Wall Street are walking away with are staggering. In their annual “Executive Excess” report, the groups United for a Fair Economy and the Institute for Policy Studies reported 2007 compensation for Lloyd Blankfein, CEO of Goldman Sachs (Paulson’s replacement), at $54 million and that of John Thain, CEO of Merrill Lynch, at a whopping $83 million. Merrill has since been sold to Bank of America, after losing more than $11 billion this year—yet Thain still wants a $10-million bonus.
Paulson, Kashkari and their boss, President George W. Bush, might not be the best people to spend the next $350-billion tranche of U.S. taxpayer money, with just weeks to go before the new Congress convenes Jan. 6 and Barack Obama assumes the presidency Jan. 20. As Watergate leaker Deep Throat was said to have told Bob Woodward, back when Paulson was just starting out, “Follow the money.” The U.S. populace, its representatives in Congress and the new Obama administration need to follow the money, close the executive-pay loophole and demand accountability from the banks that the public has bailed out.
Denis Moynihan contributed research to this column.
Amy Goodman is the host of “Democracy Now!,” a daily international TV/radio news hour airing on more than 700 stations in North America.
© 2008 Amy Goodman
Tuesday, December 16, 2008
Pakkanen jatkuu
Viime yona oli pakkasta noin 10 astetta. Se rikkoi Seattlen 44 vuotta vanhan pakkasennatyksen! Lumisadetta on luvattu huomiseksi ja kylma jatkuu ainakin ensi viikonloppuun. Samaan aikaan tama vuosi on ollut ennatyksellisen lauha ympari maailman.
Maailmankirjat on sekaisin.
--- T
Maailmankirjat on sekaisin.
--- T
Monday, December 15, 2008
Saturday, December 13, 2008
Kylmaa
Seattleen on tulossa kylmaa ilmaa Kanadasta. Pakkasta ja luntakin on luvattu useammaksi paivaksi. Viimeksi on ollut niin kylmaa 90-luvun alussa. Saa nahda...
Minusta on kivaa saada vahan lunta jotta tulee talvinen ja joulun olo; taalla vain ei ole totuttu talvisiin olosuhteisiin ja kaikki menee vahan sekaisin: liikenne, kodittomat, koulut, jopa tyopaikat.
Tuesday, December 09, 2008
Solidarity
Republic Windows closed its factory doors abruptly and threw out the workers without paying them the money they had already earned, or giving them appropriate notice. The workers have protested by taking over the factory and occupying it "until they get what is owed" to them. Bank of America cancelled the company's line of credit (even though Bank of America got tax payer bail-out money!) so the company threw out its employees.
This is so emblematic of what America has become. Unfortunately.
Perhaps there is a lesson to be learned here about solidarity...
---- T
This is so emblematic of what America has become. Unfortunately.
Perhaps there is a lesson to be learned here about solidarity...
---- T
Friday, December 05, 2008
A Little Help for Pain
Jack Daniels whiskey and Finlandia Vodka are selling well in spite of (or because of) the recent economic trouble in the United States. I suppose getting a little drunk now and then helps ease the pain of financial stress.
--- T
--- T
Thursday, December 04, 2008
Kovat ajat edessa
Paul Krugman on huolissaan Amerikan taloudesta: tyottomyys tulee nousemaan viela ensi vuonna ja muutenkin taloudella menee heikosti viela pitkaan.
Oman tuntuman mukaan olen samaa mielta. Meidan tyopaikalla (rakennamme luksusjahteja upporikkaille) sanottiin maanantaina etta ylitoita ei saa toistaiseksi tehda yhtaan (erittain epatavallista), ja keskiviikkona kerrottiin, etta 200-jalkaisen laiva ostaja on perunut kaupat - yritamme nyt myyda sita toiselle ostajalle...
Pelkaan etta seuraava askel on lomautukset. Mina olen ollut taalla alle vuoden, mutta on muutama muu jotka ovat olleet viela vahemman aikaa - vaikka ei silla valttamatta ole merkitysta, silla meilla ei ole ammattiliittoa ja sen suomia irtisanomis- tai lomautuspykalia.
--- T
Oman tuntuman mukaan olen samaa mielta. Meidan tyopaikalla (rakennamme luksusjahteja upporikkaille) sanottiin maanantaina etta ylitoita ei saa toistaiseksi tehda yhtaan (erittain epatavallista), ja keskiviikkona kerrottiin, etta 200-jalkaisen laiva ostaja on perunut kaupat - yritamme nyt myyda sita toiselle ostajalle...
Pelkaan etta seuraava askel on lomautukset. Mina olen ollut taalla alle vuoden, mutta on muutama muu jotka ovat olleet viela vahemman aikaa - vaikka ei silla valttamatta ole merkitysta, silla meilla ei ole ammattiliittoa ja sen suomia irtisanomis- tai lomautuspykalia.
--- T
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