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Friday, January 30, 2009

Bonus Time! The Party on Wall Street Isn't Over JUST Yet

Despite having run the economy into the ground, bankers still know exactly how important they are. Ironically, the TARP bailout has all but reinforced their self-importance instead of slapping them on the wrist. Why? Wall Street understands that we need them more than they need us.

It's 3:30am, the party isn't over yet. They know they can get their huge bonuses today for precisely the same reason they've always deserved disgustingly huge bonuses.

Ever since manufacturing left our shores for China with its smokey factories, almost two-thirds of our national GDP has come from the service sector. While Wall Street does not comprise the majority of the service sector, they do provide the lifeblood for the majority of its activities: credit for consumption. Our retail industry is the envy of the world not because of how many Fortune 500 retail companies we have, but because Americans on the whole can seemingly buy anything they want whenever they want without worrying about saving a penny. If you find yourself stranded overseas but want the latest toy from Apple, or the latest and greatest from Nintendo? Just import it from the indomitable USA; we'll always have it before anyone else.

Only the magic loom of Wall Street could have made this post-industrial feat possible. Whether it's in the form of 12 month 0% APR credit cards, hedging to give us the world's greatest wealth concentrated in the form of the NYSE casino, or leveraging sub-prime mortgages to give us straw in the form of gold, it's always been Wall Street that enriched all of us. Not to mention our big retail outlets probably couldn't have made payroll consistently without Wall Street's magic either.

Their good bonuses are our good fortunes in turn, as it were.

Although we are now in economic free fall, this long-held tenet in the American political economy has not changed. Not yet. But before it does change (and it will), Wall Street is going to hoard every last bit of bonus money they can because they can. It makes no difference to them whether their bonuses are comprised of tax money from their fellow citizens or deposits from far off Asian savers, and why should it? They deserve their bonuses because they gave us our lifestyle, albeit one that eventually drove us into the ground. But what's that got to do with them? Nothing. After all, they're just mere bankers merely doing their job.

Of course Wall Street knew they would be bailed out. Banks like Wells Fargo or Bank of America probably acquired absolutely toxic waste dumps like Wachovia or Merrill Lynch just so they can strengthen their case as a TARP recipient. Congress knew that; they're not stupid, and that's why they're smart enough to know they have to bail out the banks to protect the American Dream. Or what's left of it, anyway, and if only for a little longer.

The party isn't over yet but it's about 3:45am and ticking, and all poor Obama can do is play the angry father role to appease the common man. While Wall Street won't have the biggest bonuses this year, it's good enough for sixth place overall. Not bad for last call. But for me, in spite of all the doom and gloom of 4am, kicking out a bunch of disgustingly rich bankers onto the merciless streets of unemployment would hardly be the worse thing imaginable today.


Stephen said...

Good post, Miles. The government has enough to deal with right now, what with its own finances and the prospect of falling tax receipts in the near future. Now we realize that they have to deal with the very financial institutions they need to rescue committing suicide. That's basically what's happening. It's as if many financial institutions have just decided that they don't have a future, and so their managers are just running off with whatever piece of the pie they can get their hands on. Live for today, people! Live it up, while you can.

It really is the perfect metaphor for the situation that we're in.

Drew said...

Yes, quite the well-written post. I'm not sure that I agree that we need Wall Street more than they need us, however. If "we" means those of us who are not independently wealthy, and hence have to convince the wealthy to give us their money, then yes: "we" certainly do need a "them" in the form of some wealthy employers and creditors at the top of the totem pole. But does this necessarily have to mean Wall Street? The first phrase that came to my mind when I read about Wall Street today was "no longer competitive in a global economy." I'm almost totally ignorant of the global financial system, but it seems to me that somewhere in the world, there must be some other banks: banks that don't burn more money than they make; banks that perform their due diligence; banks that cull incompetent management; banks that that are capable of efficiency and cutting costs; in short, banks that are ready to swoop in and take Wall Street's market share. Bizarre as it may sound, I still have some faith in the ability of the free market to correct itself. Can those of you who have a working knowledge of global finance explain to me why the bulk of American financial transactions won't be handled by overseas firms in ten years?

miles said...

Yeah Steve, actually it's safe enough to say Wall Street was committing suicide even before it became apparent. Now that they can't do anything about their fate, enriching themselves is about the only thing left that they can do. No surprises here.

Drew, as far as the relevance of Wall Street goes, I argue that it is still an important pillar of our economy today. That's going to have to change to an extent that probably no one can yet foresee. I suppose it's conceivable that foreign firms could be at our helm one day but as you know, no bank in the world is going to have much money anytime soon. And even if they have the dough to buy up Wall Street, this assumes that we can actually convince these firms that our economy is going to stop its GDP slide and exhibit growth prospects anytime soon. More than proving to the world that American banks are capable of very foul business practices, this financial crisis has exposed our fundamental economic weakness: a post-industrial economic model of consumption over production. With Wall Street-fueled consumption broken down, right now we are not worth anything to investors. As far as our future is concerned, we have an economic clean slate right now; we can either move forward or back.

Even if we can convince foreign firms we are a worthy sale, we still have to assume that a truly free market exists in America. That is to say, even if we are worth something, Congress may not permit the sale considering that sovereign funds are the only entities who would be able to afford Wall Street anytime soon. Opposition to protectionism can be a very flaky sentiment, and so the free market is allowed to freely correct itself insofar as the proposed corrections are politically palatable.

Mike said...

hey. thanks for commenting on my blog. ill have to think about it and get back to you.... :)

Drew said...

Yes, in thinking about this a bit more it seems that the question isn't really about private firms as much as it is about public policy: is there a jurisdiction that is capable of producing superior institutions in the time it will take for the American financial sector to get back on its feet (assuming it does)?

Of course, this raises the question of regulatory competition in the context of a world economy with no world government. As Posner said in his most recent blog entry regarding pay caps, "A banker is not going to forgo a risk that should it materialize would wreck the economy, because his forbearance would have no consequence, as long as his competitors continued running the risk; it is a classic case of external costs, requiring government intervention." This is fine if your universe is a single state, but what about a universe of multiple states that are competing for investment in a global economy? Will this produce a regulatory race to the bottom or a regulatory race to the top? Too busy studying for the bar to figure it out now!

miles said...

Isn't it a bit early to worry about the future sustainability of our institutions? Right now we can barely keep above water!

Yeah man, Mr. Posher is right on. A race to a bottom is inevitable when everyone isn't subject to the same market risks. I never thought about this concept in the globalized context, so that's pretty eye opening! Global economics is a tough subject because it's so interwined with geopolitics such that the world economy doesn't always play by market rules or forces. Organizations like the WTO or the UN can only do so much precisely because they're not supposed to dabble in geopolitics. A world nation, we need? Forget that.. we're stuck with reality.

Nevertheless you can conceive of an umbrella world market under which nations are individual firms. In fact it's instructive of what needs to happen. I wrote about this in my very first post, go check it out! Basically I think that as long as the same risks or opportunities are not shared by all market participants, external cost pressures will always result in a big regulatory race to the bottom. As a solution, Spengler would say that each firm/nation must choose to regulate itself on the basis of good ethical practice, but I just don't think that's realistic.