Everybody’s furious about the bonuses being paid out to finance folks, but nobody quite knows what to do about it. This solution from The New York Times editorial page is a non-starter, and this op-ed in The Wall Street Journal explains why. In the latter, Jonathan Macey explains what has to happen:
“Politicians are frustrated because they are virtually powerless to stop the flow of bonus payments to bankers. Rep. Dennis Kucinich (D., Ohio) thinks that the U.S. should follow the lead of Britain, France and Germany and levy heavy taxes on bonuses. While such action might placate some people, it is the shareholders, not the banks, who will end up paying this tax. Worse, this sort of tax will not affect banker behavior, because it will not reduce (and probably will increase) the government’s proclivity to bail out banks that have made bad bets.
“There is only one way to resolve the bonus problem. We should continue to let shareholders pay their managers whatever and however they want. But we must get out of the business of guaranteeing against failure. The bankers and the shareholders who enjoy the rewards of risk-taking should be made to act like real capitalists: They should be required to assume the risks that go along with the banks’ business activities.
“Banks that are considered too big to fail should be dismantled into smaller pieces that the economy can digest. And the government should make it clear that it will allow these institutions to fail. When this happens, the shareholder-owners of these banks will pay their managers much more sensibly–and Mr. Obama will be able to wash his hands of the business of helping out the fat cat bankers on Wall Street.”
Don’t hold your breath, however, while the federal government gets out of the business of assuming Big Bank risk. And don’t expect members of Congress to fix the too-big-to-fail problem any time soon.
There is something individuals can do, though, to shrink the big players: be a responsible consumer. It’s simple–just pull your money out of the large banks and open accounts in smaller banks and credit unions. An organization has just been created to help you out. It was started by, among others, Arianna Huffington, and it’s called “Move Your Money.”
Here is the Web site. It has information on institutions across the country, plus background on the development of the project.
The only way to change banker behavior is to take away your assets. Punish them by doing business somewhere else. And don’t underestimate the power of closing an account with only a few thousand dollars in it. In the deposit scheme, each actual dollar in an account means many more dollars that can be loaned.
8 Responses to What to Do About the Bonuses
goxewu - January 16, 2010 at 5:15 pm
Good ideas. With all the dominoes falling exactly right, maybe half of ‘em could be in effect by about…2016.The old analogy about putting out the fire first, then making smoke alarms mandatory. And one of the rationalizations for the big bonuses is that these bankers created “value” for their companies. Value? As far as I know, they didn’t cut hair, make sausages, mine coal, invent new computer chips, paint automobiles, install fiberoptic lines, or flip burgers. What they did was to move money around and take some off the top. In Vegas, they call it skimming, and when you do it to the extent that bankers’ bonuses testify, quite soon you rest, not with the fishes, but with the cacti. Taxing these mofo’s about 90 percent is letting them off easy.
performance_expert - January 18, 2010 at 6:48 am
Mark,These are not simple times. This is new territory. I recently told my sibling, who live outside of the USA, of the 35% inflation in tuition and fees and that the news agencies tell us no news and feed us smut, weddings and divorces of people I have never heard of and do not want to know.Placing personal monies into credit unions and the like is a fine idea but it does not stop that Chase Bank is still making 50% from student loan monies. If a student borrows $50,000., Chase makes $25,000. Extend this across the country and also consider that Chases origination monies do not even need to exist, it is just the return of a computer return key in a system where the “Federal Reserve” banking system creates, literally makes into being, money out of thin air. The “Federal Reserve” is an organization with a fake name. They are not in the government telephone book. They are in the business pages next to “Federal Express.” They are a collective of private bankers, many outside the USA, that pose as a government agency. They issue loan money at a rate of 7x what they actually have. The same is done on the issuance of US currency. It is a complicated set-up and the benficiaries are the corporate entities who get all of this fresh new money and then use it with a strong arm to buy up everything, if you haven’t noticed? Do you know any strong powerful independent business owners who have not been bought out or displaced by the corporate method? There used to be strong individuals and strong business owners. Not any more.So what we have, Mark, is a situation where the public is paying rent to these overlords. Lots and lots of rent. Pay pay pay. “Rent” is an economics terms. Even taxes are used for this “rent.” Rent to get up in the morning in the USA. And that, my friend, is what this “globalization” is about, indenturing more people to pay rent to the overlords.In europe, they figured this out a while back and have some mechanisms to prevent the public from being brutally exploited. This is called “socialism” and is the provision of services without profit or exploitation. The USA is well behind europe in protecting the people from exploitation. The current situation in the USA is to prevent any education or communication of these facts. In other words, stick to the script or be eliminated. The script, of course, supports the fantasy land of admiring, working for, supporting, tolerating, and paying rent to the overlords and that is the USA 2010.This is a rare conversation because it interrupts the script.Take Care and “Support” for your continued interest in the quality of life for US citizens, though it looks like a long road through the muck. The dumbing down and disorganization of public education has been well achieved. One phone call from far away and a revolutionary teacher is harassed and eliminated. Some universities have cultivated a putty-headed student culture where soft students complain and deans and dept. heads behave as politicians to indulge the student’s complaint and whim. When I went to community college I once complained about a class and no one would even give me the time of day.Who would want to teach now, in this system of “consumer review?” Make no mistake that this system of rot has been strategically implemented. Thank You, Chase Bank. But I prefer to get you paid and then to not know you. fragmenting… paying the rent…dentist? doctor? who even has the co-pay?… rotted teeth… first, they chip ..
mbelvadi - January 18, 2010 at 9:34 am
I strongly suspect that individual ‘retail’ banking is not the financial base of the huge “commercial/investment” banks. Also note that the search box on the Move Your Money site does not include credit unions, because they’re not insured by FDIC, but by a different, parallel government agency. Finally, even if you don’t have your savings in one of the big banks, you may well find you have credit cards in your wallet with them. Those are likely far more profitable for them than your savings account. So maybe the advice shouldn’t be “move your money” so much as “move your line of credit”.All of this is pretty much symbolic anyway, not really effective, so long as the government is giving the huge banks hundreds of billions in 0% loans which they are free to turn around and lend out at anything above 0% – yes, this is happening right now and has been for months.
markbauerlein - January 18, 2010 at 11:16 am
Good points, performance_expert, but are you sure that part of theproblem isn’t that the bad policies you describe are actually supported by government action and power? And if that’s the case, is socialism the right solution?Yes, mbelvadi, good advice, too: change your credit cards!
performance_expert - January 18, 2010 at 12:22 pm
MB, Thank you for the kind words. Who knows what the answer is? Maybe to throw off the yoke of government? That is what the founding fathers said? And also what I have been thinking today. But then we lose the coordinated efficiency of services. Who knows what the answer is but currently it seems the US Gov turns to, well, bad behavior. Just read an essay that Obama has an information minister working for him that advocates using government employees on the internet to make misinformation. Read about it here: http://www.salon.com/news/opinion/glenn_greenwald/2010/01/15/sunstein/index.htmlSeems there is a persistent overall ethics problem. Once upon a time, business was business and government was government. The two have different purpose, aims and values. This is basically ancient Hindu caste system philosophy, but I think it is true. Thank you for the kind words.
dank48 - January 18, 2010 at 3:27 pm
I have to agree that the federal government should offer the same guarantees to big business that it offers to small business: none whatsoever. Obviously I have no idea exactly what would have happened had the feds refrained from rescuing the incompetents and frauds from their own folly and malfeasance, but I find it hard to believe it would be much worse, if at all, than what we’ve got, thanks to the old Republican administration and the new Democratic one.
livefreeordie2 - January 19, 2010 at 11:38 am
All of the ideas mentioned are basically fine. But the main points should be that 1. Setting compensation is none of the government’s business, and 2. The government should never be permitted to “bail out” businesses.While a degree of government regulation of all businesses is necessary and even important, to often, the government creates problems because lawmakers, especially liberal lawmakers almost never consider unintended consequences. A lot of the issues surrounding executive compensation can be traced back, I believe, to the early ’90s when the government, in an faux-populist effort to lower compensation, limited tax deductibility to $1 million. Businesses responded by providing equity based compensation. I never found it surprising that accounting scandals followed since boosting share prices became “personal.” Every change the government makes will cause a reaction. Remember the luxury tax on yachts? Rather than produce revenue, it drove the yacht makers out of business because the wealthy went overseas.The best way to handle compensation and bonuses is to keep the government out and let the boards and shareholders determine what works. That, and if a company fails, it’s gone no matter how big it was.
goxewu - January 20, 2010 at 8:58 am
livefreeordie2 has a point with “The government should never be permitted to ‘bail out’ business.” And the particular instance of the government bailing out big banks is an anathema to us liberals. But, as with a lot of simple, common-sense-sounding principles (e.g., the libertarian, “The government has no business regulating what people want to put into their own bodies”), it gets complicated when the principle runs into, well, complications. The chief reason given for the bailout was that letting the big banks fail would result in the domino-like collapse of the whole system of credit on which the entire economy depends. (It’s been a long, long time, for instance, since people “saved up” the entire price of a car or a home in order to buy it.) And to let the automakers simply fail would have thrown hundreds of thousands of people out of work, which would have caused the collapse of untold businesses depending on the workers’ being customers. Even if somebody else–maybe a Japanese, Chinese, or Indian corporation?–bought the assets of the failed car companies and started to produced automobiles in them, it would have taken a long time before the abandoned workers got jobs again. And so on.Now, I’m not an economist and, like a lot of people who simply read the newspapers about economic matters, I have to take a lot of this on faith. Perhaps simply letting the banks and the automakers fail would have produced an instant “morning in America,” with happy workers gainfully employed in born-again car companies and bankers who’d gotten obscene (yes, obscene) bonuses all their professional lives on account of the Golden Rule (“He who has the gold makes the rules”) selling apples on street corners. But something told me not. And I didn’t think the President I voted for–the “socialist” one, you know–would be supporting a bailout unless it were an ugly necessity. But, as I said, a lot on faith–which is the nature of everyday opinions in this world of hyperspecialization.Finally, speaking of “bailouts,” I think we should consider the ongoing ones, which are called “subsidies.” They’re bailouts, too, only dispersed not in sudden, wholesale, melodramatic fashion, but all along, as a matter of “normal” operating procedure. So, I would ask those opposed on principle–conveniently retroactively at this point, in a society that hasn’t turned into Weimar Germany–if they’d advocate the sudden and complete yanking of subsidies from American agriculture. Hey, if farmers–from our sentimentally precious “family farms” to agribusiness–can’t make a profit, let them fail and sell their land to somebody who can. Note on the last paragraph in #7: From what I gather, executive compensation is largely determined by the one-hand-washes-the-other members of interlocking boards (a k a The Old Boys Network), and not by individual shareholders. I don’t see the possibility of lots of widows from Iowa getting on busses and traveling to, say, New York, to form coalitions to determine their CEOs’ salaries.