What is wrong with the US economy? Part 2

[mheslep]

...also, for those of you that are environmentally-sensitive, it's a huge step backwards. it takes a lot of energy and resources to go on like this.

It doesn't necessarily require the current amount of energy and resources to enjoy this (Russ's wide screen TV ) lifestyle. The new energy Sec. Chu suggests it is possible for the entire world, population topping out at 10 billion people, to enjoy a western lifestyle - just not using the current energy technology.:

 

[turbo]

Whoa. A public resource? Like water and parks? If I start a company and play by the rules. It does well and a I then decide to sell some shares publicly, then the company becomes public resource by declaration? By that logic, any non shareholder, is then entitled to come take a part of it? Pitch a tent in the office?

The rules are poorly-defined and the SEC has done very little to rein in abuse. Remember Enron? Remember how dishonest bookkeeping, collusion with "auditors", and insider trading stripped wealth from employees, shareholders, and the US taxpayer? We need a higher standard of honesty, ethics, and responsibility in business. These people are benefiting from structures set up not only by private concerns, but by the US government, including the Fed, which tightly controls access to currency to ensure that these entities have favorable business climates in which to operate. A lot of taxpayer dollars goes to efforts to support big businesses at the expense of the middle-class. My wife and I have scrimped and saved for all our lives so that we could have a secure (not lavish) lifestyle in our retirement, and the Fed has depressed interest rates (in favor of businesses and banks) to the point that we can earn little or nothing on our savings. The flow of wealth to the wealthy continues undiminished, and it is high time that some balance is restored.

 

[Proton Soup]

It doesn't necessarily require the current amount of energy and resources to enjoy this (Russ's wide screen TV ) lifestyle. The new energy Sec. Chu suggests it is possible for the entire world, population topping out at 10 billion people, to enjoy a western lifestyle - just not using the current energy technology.:

lol, if only it weren't for that pesky little energy problem.

 

[mheslep]

... My wife and I have scrimped and saved for all our lives so that we could have a secure (not lavish) lifestyle in our retirement, and the Fed has depressed interest rates (in favor of businesses and banks) to the point that we can earn little or nothing on our savings.

What rate do you need? Inflation is nil. GE bond 9-10% yield to maturity. AAA paper.

 

[mheslep]

lol, if only it weren't for that pesky little energy problem.

http://www.lbl.gov/Publications/Director/assets/docs/AAAS_Keynote_B.pdf
Slide 20-21

 

[turbo]

What rate do you need? Inflation is nil. GE bond 9-10% yield to maturity. AAA paper.

Inflation is nil? Do you ever need/use health care? Do you eat food? Do you have to pay property taxes? All the unavoidable costs are going up and some of them are going up at impressive rates. It is possible to buy a car, clothing, etc, at reasonable prices in this economy, but unavoidable expenses out-strip any possible interest rates one can realize in any liquid investments.

 

[russ_watters]

But in real dollars your 4" plasma cost the same as their 1970-20" color, which cost the same as their first 1950 B+W.

I assume you meant 42" plasma...but yes. Electronics are deflationary due to technology advancing.

Whereas in cars the real dollar price keeps going up and is justified with bigger engines, DVD players and cup holders. Why can't I buy the equivalent of a 2CV, original mini or VW beetle.

I think that "justification" is a pretty good one. My mother paid $2,000 for her 1968 Camaro, which, according to an inflation calculator is about $12,000 now. Her Camaro didn't have A/C, power anything, airbags, much of a stereo, computerized engine control, etc., etc., etc. These things cost money and I suspect when you add them up, they'll account for the difference in cost between then and now (starting at $22,000).

 

[mheslep]

Inflation is nil? Do you ever need/use health care? Do you eat food? Do you have to pay property taxes? All the unavoidable costs are going up and some of them are going up at impressive rates. It is possible to buy a car, clothing, etc, at reasonable prices in this economy, but unavoidable expenses out-strip any possible interest rates one can realize in any liquid investments.

I'm sorry if you have some new and extraordinary expenses. I'm referring of course to the last 4-5 months. Of the items mentioned here, only health care is going up significantly. Obviously property taxes have dropped - for everyone (on average) in the United States. The price of gas has collapsed. The CPI for food in 2009 is 3 to 4%. This is not to say that some commissar in Maine could have decided to raise property taxe rates in a recession.

 

[russ_watters]

Because they are employers, not employees. If Carl Icahn can land a big movie deal or pitch for the Yankees, let him pull in a big contract as an employee. If he wants to make a ton of money every year, let him take his company(s) private and make his own rules. Publicly-traded companies should be subject to rules and regulations, for the good of our country, and salary-caps, elimination of stock-options, would be a fair way to accomplish this.

That's a "should", but not a "why". Why? is running a company not worth (for example) $10,000,000 a year? A ceo most certainly has more responsibility (more ability to help or hurt a lot of people) than CC Sabathia. So it makes a lot of sense to me that they should be compensated highly. How highly? Well that depends, but in the recent hubbub, I haven't seen much in the way of specifics, so it is hard to really judge if there was excess.

 

[russ_watters]

people are buying much more than they need.

Quite right - and my parents didn't need their old b/w tv any more than I need my plasma. But they wanted it, and I wanted my plasma. So I got it!

more than they can really afford.

Well that can be a problem - but if people can afford their "stuff", there is no good reason why they shouldn't have it.

...it's not at all about progress. more often than not, it's about trying to maintain an image of prosperity, or putting on airs as people would once say.

You really think people are that shallow that they buy stuff like a plasma for the image (well...pun intended). No, people mostly by "stuff" because they like "stuff". But heck, even if they did buy it because they wanted to make their friends jealous, so what? It's a free country!

...also, for those of you that are environmentally-sensitive, it's a huge step backwards. it takes a lot of energy and resources to go on like this.

What are you suggesting, that we de-industrialize? We have all the energy we need for the forseeable future, so I see no reason why that should be an issue.

lol, if only it weren't for that pesky little energy problem.

There is no energy problem - or, rather I should say, false environmentalism has created the image of an energy problem that doesn't really exist. But I assure you: we're not going to run out of energy in the next few hundred years. This BS pseudo-environmentalism will run it's course when energy starts getting expensive because of it or if global warming actually happens. Then the world will switch to nuclear power and we'll be set energywise for centuries.

 

[mheslep]

But in real dollars your 4" plasma cost the same as their 1970-20" color, which cost the same as their first 1950 B+W.
Whereas in cars the real dollar price keeps going up and is justified with bigger engines, DVD players and cup holders. Why can't I buy the equivalent of a 2CV, original mini or VW beetle.

I assume you meant 42" plasma...but yes. Electronics are deflationary due to technology advancing. I think that "justification" is a pretty good one. My mother paid $2,000 for her 1968 Camaro, which, according to an inflation calculator is about $12,000 now. Her Camaro didn't have A/C, power anything, airbags, much of a stereo, computerized engine control, etc., etc., etc. These things cost money and I suspect when you add them up, they'll account for the difference in cost between then and now (starting at $22,000).

Here's just what you want mgb_phys: $2500 car. No A/C, no airbags, no Ralph Nader in the passenger seat.
http://jalopnik.com/343003/the-2500-tata-nano-unveiled-in-india
Roomy 4 door! 30 hp gets a blazing 0-43 mph in 14s.

 

[russ_watters]

The rules are poorly-defined and the SEC has done very little to rein in abuse. Remember Enron? Remember how dishonest bookkeeping, collusion with "auditors", and insider trading stripped wealth from employees, shareholders, and the US taxpayer? We need a higher standard of honesty, ethics, and responsibility in business.

Equating high ceo pay with crimes is a non-sequitur: it isn't illegal to pay a ceo a lot of money.

These people are benefiting from structures set up not only by private concerns, but by the US government, including the Fed, which tightly controls access to currency to ensure that these entities have favorable business climates in which to operate. A lot of taxpayer dollars goes to efforts to support big businesses at the expense of the middle-class. My wife and I have scrimped and saved for all our lives so that we could have a secure (not lavish) lifestyle in our retirement, and the Fed has depressed interest rates (in favor of businesses and banks) to the point that we can earn little or nothing on our savings. The flow of wealth to the wealthy continues undiminished, and it is high time that some balance is restored.

Low interest rates should not have a negative effect on your financial situation: there are better ways to make your money grow than fixed-income investments and low interest rates help free up your money for those better investments (ie, by making your house payments lower).

 

[mgb_phys]

Here's just what you want mgb_phys: $2500 car. No A/C, no airbags, no Ralph Nader in the passenger seat.
http://jalopnik.com/343003/the-2500-...eiled-in-india
Roomy 4 door! 30 hp gets a blazing 0-43 mph in 14s.

Thats exactly what I would want - although ideally everybody else shouldn't be driving military 4x4s.
I don't need AC, I live far enough north that I can open a window, an I can do that without an electric motor. Airbags don't serve a lot of purpose if you are wearing a seatbelt, they are for people who insist on not wearing seatbelts while trying to defy Darwin!

 

[russ_watters]

Airbags don't serve a lot of purpose if you are wearing a seatbelt...

That really isn't true. In fact, it's basically backwards. Airbags will keep you safe without a seatbelt only in a low speed crash - where you wouldn't get hurt badly without either anyway. In a high speed crash, an airbag won't keep you from going through the windshield and they are designed with the assumption you are wearing a seatbelt.

 

[turbo]

Low interest rates should not have a negative effect on your financial situation: there are better ways to make your money grow than fixed-income investments and low interest rates help free up your money for those better investments (ie, by making your house payments lower).

I do not have any house payments, nor do I owe anybody any money for loans. My wife and I worked our butts off, and have not any interest-bearing debt for over 20 years. You are stuck in a paradigm that might have worked for wage-slaves years ago, but do not apply to people who are self-sufficient and hard-working, either then or today. We don't have the ability to reduce "debt" or interest payments because we do not have any of them, nor do we have any way to leverage the current system. We try to ride this crap out while watching our real worth fall and while watching the crooks prosper. Not real fun.

 

[mgb_phys]

That really isn't true. In fact, it's basically backwards. Airbags will keep you safe without a seatbelt only in a low speed crash .

Thats what I was saying - a lot of the work in airbags is trying to make them useful in saving idiots that AREN'T wearing seatbelts.
Seatbelts save lives - airbags might prevent a seatbelt wearer breaking their nose, but aren't a huge extra improvement if you are already belted in. If you wanted to improve safety in addition to seatbelts you would require either 5point racing type belts or bicycle helmets for car drivers.

Fitting more and more airbags, as in our new 09 model has 27 airbags and 37 cupholders is largely based on justifying raising the price.

 

[Astronuc]

Some of what happened (<2009) and what is happening (now in 2009).

Following Clues the S.E.C. Didn’t
http://www.nytimes.com/2009/02/01/business/01gret.html

By GRETCHEN MORGENSON

TWO events occurred last week that seem unrelated. But, as often occurs in our interwoven world, connecting the dots is revealing.

First was Linda Chatman Thomsen’s testimony last Tuesday before the Senate Banking Committee. Ms. Thomsen, the director of enforcement at the Securities and Exchange Commission, offered her take on how the nation’s top securities cop missed the Ponzi scheme Bernard Madoff is said to have run for decades, noting how assiduously the S.E.C. chases tips it receives.

“Without fear or favor,” she said.

The next day, shares in Allied Capital, a business development company that invests in small to midsize concerns, plummeted almost 50 percent. Allied, whose stock was favored by small investors for its rich dividend, said it was trying to renegotiate its own loans amid the credit crisis. Dividend in danger, Allied’s stock closed at $1.56 on Friday; last September, the shares touched $16.

The two events are linked by this: Just as the S.E.C. failed Mr. Madoff’s investors as tipsters told the agency he might be up to no good, it also seems to have let down Allied’s shareholders by ignoring analyses of aggressive accounting at the company.

Critics of Allied — primarily short-sellers — who did such work said the company’s accounting inflated assets and put investors at risk.
. . . .
It wasn’t until five years after critics began questioning Allied’s books that the commission moved against the company. In a June 2007 action, the S.E.C. found that Allied violated record-keeping and internal-controls provisions of securities laws relating to the valuation of illiquid securities it held. In a settlement, Allied neither admitted nor denied the allegations; not a nickel in fines or penalties was assessed.

Less than two years later, Allied is trying to weather the credit storm. Dale Lynch, executive vice president at Allied, said the company was working with its lenders “so that we can continue to serve the needs of America’s midsized businesses, many of whom depend upon business development companies to fuel their growth.”
. . . .
It is a tale recounted engagingly in the book “Fooling Some of the People All of the Time,” by David Einhorn, founder of the New York hedge fund Greenlight Capital. Published last year, it is a compelling account of his five years battling Allied and trying to interest regulators in the company’s practices.

“Fooling Some of the People” should be required reading for Mary L. Schapiro, the new chairwoman of the S.E.C. Ditto for anyone else interested in assessing our nation’s broken-down regulatory apparatus.

H. David Kotz, the new inspector general of the S.E.C., already seems to have paged through Mr. Einhorn’s book. Mr. Kotz’s most recent report to Congress indicates that he is investigating the problems Mr. Einhorn encountered with the S.E.C. when he gave it information about Allied’s aggressive accounting.
. . . .

Auto suppliers want US government bailout
http://news.yahoo.com/s/afp/20090201/bs_afp/financeuspoliticsautosuppliers

DETROIT, Michigan, (AFP) – Auto suppliers are preparing to head to Washington to ask for government help in surviving a deep slump in car sales that has slashed the production of new cars and trucks to the lowest level in a generation.

"We're formulating our position and the scope of what a potential ask might be," said David Andrea, vice president of Original Equipment Supplier Association, which is expected to handle the petition for the supplier companies.

Suppliers had already asked for help in November when Congress was considering a bailout of cash-strapped General Motors and Chrysler, who were granted 13.4 billion dollars in loans.

Since then, the situation has worsened as US production was slashed by 36 percent in December and is expected to be down even more in the first quarter after GM, Ford and Chrysler halted nearly all production in January.

To top it all off, Chrysler said it is seeking price cuts from suppliers as part of the viability plan it has to submit to the US Treasury Department on February 17.

Dozens of suppliers could be on the verge of collapse, warned Linda Hasenfratz, president of the Original Equipment Suppliers Association.

"There is no production. So there is no cash coming in," said Hasenfratz, who is also the chief executive officer of Linamar Corp. of Guelph, Canada.
. . . .

Americans' saving more, spending less
http://news.yahoo.com/s/ap/20090201/ap_on_bi_ge/savings_frugal_society

Housing bust hits hard in small NC factory town
http://news.yahoo.com/s/ap/20090201/ap_on_bi_ge/economy_small_town

Glaxo 'to slash thousands of jobs'
http://news.yahoo.com/s/afp/20090201/wl_uk_afp/britainpharmacompanyearningsgsk_20090201173414

LONDON (AFP) – British drugs giant GlaxoSmithKline will announce it is cutting up to 10,000 jobs when it posts full-year results this week, reports said on Sunday.

The global pharmaceuticals giants are facing a growing commercial challenge from cheap, generic drugs as dozens of high-selling medicines lose patent protection.

GSK's rival AstraZeneca said on Thursday it would axe more than 6,000 jobs by 2013, extending a cost-cutting programme that had already shed about 8,000 positions since 2007.

 

[Astronuc]

On PBS - NOW (1/30/09)
Billions in Bogus Bonuses?

http://www.pbs.org/now/shows/505/index.html

What should his administration do to crack down on banks, given that some experts are suggesting an additional $1 trillion to $2 trillion may be needed to bail them out?

This week, David Brancaccio sits down with financial reporter Bethany McLean —who broke the Enron story —to look at options on the table for stabilizing the country's financial system. Is nationalizing our banks a viable solution?

Almost everyone agrees that our banks need federal money to avoid even more calamity, but how much is too much, and who's watching how they spend it?

McLean makes great points - particularly that the bonuses of the last two or three years have been generated on profits that were illusory, i.e. didn't really exist except on paper.

Given that - it would seem that some individuals in these financial institutions violated US Code Title 18, Chapter 63 -

Whoever knowingly executes, or attempts to execute, a scheme or artifice—
(1) to defraud a financial institution; or
(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;
shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

If this doesn't apply, perhaps there are other sections, and if it is not clear that bogus profits are illegal, then such activities need to be added to the code.

On the other hand, how about - David Korten: Let Wall Street Fail
http://www.pbs.org/now/shows/505/new-economy.html

 

[OmCheeto]

On PBS - NOW (1/30/09)
Billions in Bogus Bonuses?

shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

If this doesn't apply, perhaps there are other sections, and if it is not clear that bogus profits are illegal, then such activities need to be added to the code.

hmmm... Is it too late to nominate you for attorney general?

 

[mheslep]

...McLean makes great points - particularly that the bonuses of the last two or three years have been generated on profits that were illusory, i.e. didn't really exist except on paper.

Given that - it would seem that some individuals in these financial institutions violated US Code Title 18, Chapter 63 -

Good grief. She means illusory in the sense that the value assigned to your house or my house from, say, 2005 can now be seen as 'illusory'. Since I sold a house in 2005 for a price that must now be down %30 am I also to be charged with violations of Title 18 in your Grand Inquisition?

 

[Astronuc]

Good grief. She means illusory in the sense that the value assigned to your house or my house from, say, 2005 can now be seen as 'illusory'. Since I sold a house in 2005 for a price that must now be down %30 am I also to be charged with violations of Title 18 in your Grand Inquisition?

Illusory in things like booking revenues based on gambling with credit default swaps (and other dubious financial instruments), which incurred huge obligations well above capitalization.

The activities at financial institutions need to be investigated, and that is what NY State AG is doing.

We didn't get into this problem because people did a great job or excelled in competence.

There are at least two people who exchange emails about bogus investments, but I don't remember if it was Merrill Lynch or Lehman Brothers. Both are under investigation.

As a homeowner, the code would not apply because of said ownership.


It's not my Inquisition. It's the responsibility of the states and federal government to determine if certain laws were violated - like at Allied Captial - in which "Allied violated record-keeping and internal-controls provisions of securities laws relating to the valuation of illiquid securities it held."

Did financial institutions sell bogus investments, e.g. by violating their own internal procedures and requirement, or those of state and federal laws? Did financial institutions mislead investors or provides misrepresentation of risk?

 

[OmCheeto]

Good grief. She means illusory in the sense that the value assigned to your house or my house from, say, 2005 can now be seen as 'illusory'. Since I sold a house in 2005 for a price that must now be down %30 am I also to be charged with violations of Title 18 in your Grand Inquisition?

I was actually going to recommend something like that.

My friends daughter got divorced from her worthless husband 2 years ago and since she was the breadwinner, she had to cough up all the cash. Everyone told her that their second house was way overvalued by about 3x because of the bubble but she wanted to get rid of the douchebag so she settled, and gave the mofo $100k cash to get the hell out of town. Now the second house is worth about a buck fifty and she's stuck with a $200k debt load.

I've met both.

The douchebag has all the cash, but has never been a contributing member of society as far as I can tell. The woman that has worked her entire life to get ahead is now screwed.

I say find the guy, cut his nads off, and sell his assets to China.

Otherwise they're going to nuke us for not paying the light bill.

Edit: Ok. This was one of the silliest post's I've ever made. Still though, I'd like to kick the guy where it hurts.

 

[mheslep]

...The activities at financial institutions need to be investigated, and that is what NY State AG is doing.

Yeah? Thats what Cuomo is doing? Perhaps. Perhaps Cuomo wants his name in the paper ala Spitzer, riding atop a wave of ambiguous populous hand waving charges made on the internet.

 

[mheslep]

Bethany McLean, who as Astronuc noted wrote the '01 Enron story in Fortune, has a lengthy piece out in Feb. Vanity Fair, http://www.vanityfair.com/politics/features/2009/02/fannie-and-freddie200902?currentPage=1". Based on all that I've read so far on the GSE's, mortgage securities, OFHEO, politicians, I think its excellent - by far the most in depth history out there so far. I think it must completely reset the starting point for discussions on GSEs and the politics of the mortgage industry to a higher plane. It will be interesting to see what kind of criticism she comes under, given the muscular attack machine she attributes to Fannie and its allies. Its also interesting that she someone points a finger at Paulson as the guy most responsible for kicking the long term investigation of Fannie & Freddie to the curb.

Note also that the cost to the taxpayers for the GSE's losses are now cited by the CBO as $240B in 2009. Those are pure losses, i.e. the money is gone, not capital injection bailouts ala the TARP. AIG capital investments were the highest single outlay by comparison, at $150B - money the taxpayer may see returned.
Jan 2009 CBO.
http://www.cbo.gov/ftpdocs/99xx/doc9958/01-08-Outlook_Testimony.pdf
Page 2.

 

[ThomasT]

On the other hand, how about - David Korten: Let Wall Street Fail
http://www.pbs.org/now/shows/505/new-economy.html

Thanks for the link(s). Interesting proposal(s) by Korten et al.

Question: for economic overhaul to happen wouldn't political overhaul be necessary? That is, it doesn't seem likely to happen in our current two-party (or is that, effectively, one-party) system -- in that both the major parties, and political protocols on every level, seem tied to the status quo (a situation that is problematic for some, but not for all).

I don't see either Democrats (and this includes Obama) or Republicans doing anything significant to effect the sort of large-scale change that Korten is advocating. There's simply too much invested in the status quo.

 

[Astronuc]

Bethany McLean, who as Astronuc noted wrote the '01 Enron story in Fortune, has a lengthy piece out in Feb. Vanity Fair, http://www.vanityfair.com/politics/features/2009/02/fannie-and-freddie200902?currentPage=1". Based on all that I've read so far on the GSE's, mortgage securities, OFHEO, politicians, I think its excellent - by far the most in depth history out there so far.

Agreed


From pg 6.

Despite that, no new legislation for regulation of the G.S.E.’s made it through Congress. While it is true that votes often broke along partisan lines, with the Democrats siding with Fannie and Freddie, it’s also true that Republicans often broke ranks. In one instance, Senator Bob Bennett, a Republican from Utah, sabotaged a bill by adding an amendment that favored the G.S.E.’s. (Bennett’s son worked for Fannie’s partnership office in Utah.) Congressman Mike Oxley, an Ohio Republican and a recipient of much campaign cash from the G.S.E.’s, also introduced bills that the administration thought were too weak. “I think the administration, for whatever reason, wants to do a lot more than is possible,” said Oxley. Says former congressman Richard Baker today, “There were Democrats and Republicans who had reservations.… It was not a partisan thing.”

Maybe the truth is that, as one person puts it, “everyone was still scared of Fannie Mae and Freddie Mac.” Or maybe the truth is that everyone—not just Democrats, and not just Republicans—was terrified that hurting Fannie and Freddie would, as the G.S.E.’s always said, hurt the housing market. “Everybody had a fear of the unknown,” says consultant Bert Ely, another longtime G.S.E. critic.
. . . .

Then later on page 6

t the same time, a critical change was occurring in Fannie’s and Freddie’s businesses. By the mid-2000s, the mortgage market was radically different than it had been in Fannie’s and Freddie’s golden years. What we now all know as the subprime business had taken off, and a whole new breed of opportunistic lenders, such as IndyMac and Washington Mutual, were selling their mortgages to Wall Street, which churned out its own mortgage-backed securities. These were often referred to as private-label securities, or P.L.S.’s, because they bypassed Fannie and Freddie and didn’t have the G.S.E. imprimatur. As a result, Fannie and Freddie, which had always been selective as to which mortgages met their criteria for purchase, saw their market share plunge. Shareholders and customers were begging them to dive into this new, highly profitable world.

Although both companies resisted due to their worries about the riskiness of the new products, eventually senior executives disregarded internal warnings, because the lure of big profits was too great. “We’re rushing to get back into the game,” Mudd told analysts in the fall of 2006. “We will be there.” Both companies did two major things. For their portfolios, they bought Wall Street’s P.L.S.’s. They also began to guarantee so-called Alt-A mortgages—loans made to people who had better credit scores than a subprime customer’s, but who might lack a standard job and pay stub. (These mortgages came to be known as “liar loans,” because either the customers or the brokers, or both, were often just making up the information on the applications.) By the spring of 2008, the companies owned a combined $780 billion of the riskiest mortgages, according to the Congressional Budget Office, even though they had bought P.L.S.’s that were rated Triple A by the rating agencies and they thought their Alt-A product was conservative. But they bought in bulk.

. . . .

There seem to be problems with respect to ties between politics (or politicians) and people in finance. The government (administration and congress) enabled Fannie Mae and Freddie Mac, who enabled Wall Street - so it seems.

After not doing it's job (of oversight and regulation), the government panicked.

As I see it, besides basic dishonesty (e.g. 'liar loans), there are structural deficiencies in the economy that preclude that ability to repay some (as of now unkonwn) amount of accumulated debt (as a result of inflated housing prices). The problem was exacerbated by higher energy prices (and perhaps health care), which drove many mortgages holders over the edge.

As for a resolution, yes, there are those who have a vested interest in the status quo, but it's also likely that many who for now just cannot grasp the magnitude of the problem. It's a bit like the Titanic vs Iceberg - the crew could not respond fast enough so Titanic hit the iceberg, but then the ship was not supposed to sink, . . . .

 

[rootX]

http://news.bbc.co.uk/2/hi/business/7870638.stm

US President Barack Obama has announced a $500,000 (£355,000) limit on executive pay at US firms that need substantial fresh government aid.

I wonder how helpful that would be.

Doesn't look like a good idea to me.

 

[Ivan Seeking]

http://news.bbc.co.uk/2/hi/business/7870638.stm



I wonder how helpful that would be.

Doesn't look like a good idea to me.

I think it's brilliant! But you have to look at the whole package and think about the logic. First of all, the government is acting like a capitalist and implementing the golden rule: If you want my gold, I make the rules. So this motivates those companies looking for a free ride to work out their problems without taking bailout money. In other words, it helps to fend off the deadbeats [which would include the likes of Larry Flint who was targeting this issue] and those who find it too easy to come with hat in hand. Next, the CEOs would be allowed stock options in their own company in addition to the $500K, but they couldn't cash in on those stocks until the government [us] is paid back with interest. This helps to ensure that CEOs actually work to pay back the loans and keep their eye on the long-term interests of the company. It helps to remove the short-sighted, quick-buck mentality that helped to create this disaster. It also allows for highly lucrative incentives that are only real if the company is successful - it is a built-in mechanism for merit pay.

I have to laugh when I hear the complaint that we won't be able to attract the best talent if we limit pay packages. That would be the same "talent" that got us into this mess, right?

 

[russ_watters]

I have to laugh when I hear the complaint that we won't be able to attract the best talent if we limit pay packages. That would be the same "talent" that got us into this mess, right?

Good talent, bad talent, whatever - if they can only make a guaranteed salary of $500 k, they will go elsewhere.

I agree that this is misplaced/unreasonable interventionalism. The only way I can see it could be made reasonable is if the CEO pay were tied to an equation about company size, for example $500K + $1,000 per employee.

First of all, the government is acting like a capitalist...

You do realize that that's an oxymoron, right? Except by undoing its own socialistic practices, a government can't do anything capitalistic, by definition of the word: capitalism is free market without government intervention.

Another problem with this is it encourages just the type of situation people hate the most: people like Bill Gates who'se income was derived almost entirely from stock options, which are taxed (assuming they are held for a year) at the capital gains rate instead of the income rate. There is a simple solution to that, though: tax stock option income as income, regardless of how long the options are held.
[fixed important typo - in bold]

 

[JorgeLobo]

It isn't a good idea. This will certainly not be the only ignorant government intrusion into these businesses. Central planning by the gov doesn't work.

Indeed - the talent from other business and business sectors will not be interested in limited remuneration and even more so the expectation the government will veto decisions and direct their actions.

 

[OmCheeto]

Good talent, bad talent, whatever - if they can only make a guaranteed salary of $500 k, they will go elsewhere.

Good. But where will they go? I suppose they could just buy Africa.

I googled "feeling sorry for the rich" and ran across the following article. For some reason, some numbers seem more interesting than others.

http://www.guardian.co.uk/politics/2005/jan/11/economy.g8"
Sweden proves neoliberals wrong about how to slash poverty. But Brown isn't listening
George Monbiot
guardian.co.uk, Tuesday 11 January 2005 09.11 GMT

The 10 richest people on Earth have a combined net worth of $255bn - roughly 60% of the income of sub-Saharan Africa.
The world's 500 richest people have more money than the total annual earnings of the poorest 3 billion.

I think it would be wonderful to make $500,000 in one year. According to the Social Security Administration, it's taken me 35 years to make my $500,000.

But that's just being selfish, thinking I deserve that much money so quickly. I think income should be profit driven, just like when you own your own little company. And it shouldn't be limited to just the executive staff. I think the little people who do big things for a company should profit a bit. Once I saved one of my companies I worked for about $10,000,000. All I got was a thank you note. I really didn't think that was fair. But they didn't pay bonus's so I guess it was alright. I did leave the company a while after that. Not because of that particular incident, but because the job was a bit annoying. Still though, if they'd given me 1/10 of 1% of what I'd saved them, I might have stayed on, and saved them a bit more. So I guess I do understand the reasoning behind incentive pay and bonus's. But I think it's a bit odd that people get bonus's and huge salaries when they've driven their companies into virtual bankruptcy.

But getting back to that little article I mentioned, which is a bit aged, I wonder how Sweden and England are doing more recently:

Sweden: GDP - per capita (PPP): $39,600 (2008 est.)
United Kingdom: GDP - per capita (PPP): $37,400 (2008 est.)
(source: CIA World Factbook)

 

[Gokul43201]

The only way I can see it could be made reasonable is if the CEO pay were tied to an equation about company size, for example $500K + $1,000 per employee.

Wow! That would give Citigroup's CEO, Prince, a nice salary of over $300 million a year.

How about this: S = 500,000 + Min[0,{1000N-(D/50)}]?
S = salary
N = number of employees
D = outstanding debt from TARP allocations

It isn't a good idea. This will certainly not be the only ignorant government intrusion into these businesses.

It certainly is not. The ignorant government already intruded into these businesses by bailing their asses out. But heck, if say Citi doesn't like this kind of Government intervention, maybe they would be happier returning the $25 Billion in direct TARP allocation, the $50 Billion the Fed spent in buying up preferred stock, and it can tell the Fed that it doesn't need their stinking $300 Billion asset guarantee.

I'm not crazy about the Obama proposal, and I really wish the markets would have been allowed to kick the CEOs in their jewels, rather than the Government save them from market forces and deliver the knee themselves.

But let's see how many CEOs and other top execs in TARP beneficiaries move out to non-beneficiary companies. There must be lots of non-TARP companies waiting to gobble up TARP execs at bargain prices. The ensuing dynamics and shift in equilibrium will be interesting to watch.

 

[ThomasT]

http://news.bbc.co.uk/2/hi/business/7870638.stm

I wonder how helpful that would be.

Doesn't look like a good idea to me.

Maybe it's just a smokescreen to appease those who want a more equitable arrangement. Maybe that executive (whose company gets 10 billion on the condition that the executive accept a salary cap) has ways of actually getting more money (from the government gift) than his previous salary and perks. This bailing out business isn't a transparent process.

Anyway, assuming it is a real cap on what executives accepting government handouts can get officially paid, what does it have to do with ... anything? How will giving Mr. Executive less money help the economy? How will it significantly impact Mr. Executive's company? Not much. A few million bucks here or there is negligable.

 

[Gokul43201]

A proposal from Carly that I kinda like: http://www.cnn.com/2009/POLITICS/02/05/fiorina.pay/index.html

 

[Ivan Seeking]

Good talent, bad talent, whatever - if they can only make a guaranteed salary of $500 k, they will go elsewhere.

Oh darn, the people who created this mess might go elsewhere. I would suggest that China is a wonderful place to relocate.

I agree that this is misplaced/unreasonable interventionalism.

No problem: Don't take the money.

You do realize that that's an oxymoron, right? Except by undoing its own socialistic practices, a government can do anything capitalistic, by definition of the word: capitalism is free market without government intervention.

You do realize that asking for government money because the companies are "too big to fail" was where the free market failed, right? Any lender has the right to set the terms of the loan. That IS capitalism. Anything less would be a fool's game.