Capitalists, Socialists, and OPM

The indignant screams still echo on Wall Street: Obama's a Socialist! As its own hometown paper puts it, the President's pronouncement that its collective $18 billion year-end tip was "outrageous" amounted to "targeting what capitalists we have left for abuse" (WSJ, Feb 2).

This is all helpful clarification, because I was getting confused. I had this fuzzy, but obviously incorrect, recollection from college that in a capitalist society it was the owners of the "means of production" who got the value created by their use.

But now I've got it: at least on Wall Street, it's the workers using those means of production (their firms' money) who are entitled to any profits they make. And, apparently, small groups of those workers are entitled to their profits even if other parts of their firms have catastrophic losses that require the owners of the enterprise to put in more money (or new owners, like taxpayers, have to be brought in) to keep the cooperative afloat. So that's capitalism. Wow, did I have it backwards!

Maybe you can understand my confusion, though. For example, I thought I heard many of these same Wall Street guys excoriating the UAW as "socialist" because its workers were making a cushy living while their employers were crashing and burning. The machinists might've been doing their jobs perfectly, but since GM made countless macro mistakes, the line guys needed to take a haircut.

Seemed right to me when I heard it, and still does... it's just that, to my uneducated eye, the situation on Wall Street looks much the same. The only real difference is that, with the agreed elimination of the jobs bank, the car industry is doing something about its entitlement culture, whereas the boys downtown are in histrionics over the idea that they shouldn't make big money unless their employer does.

Sure, I get it: this was part of the deal. Rather than earning a set number of dollars per hour, you have to generate your own business opportunities. Most bankers agree to a very modest salary, but fight like dogs to generate profits from which they'll get most of their take-home pay. So, yes, much of the $18 billion was really part of what people thought of as their salaries. And it's not the fault of the guys who did their jobs well, grinding out business without taking ridiculous risks, that their cohorts were busy playing Sky Masterson.

But like a baseball team where every batter tries to hit a home run, the Street's current compensation system generated tons of losses, even though some individual stats look good. The result, just like in the bigs, was a lot of grossly overpaid superstars on a bunch of really bad teams. No one should be shocked that the paying customers are booing everybody at the same time.

Look, there's nothing wrong with the Street's "eat what you kill" mentality. Except the bankers must remember that, in the wild, if the Tribe doesn't survive, no one eats at all (except the other tribe).

Why did Lehman survive for 150 years, through other financial crises as bad as this one, but go down just now? Because, for most of its history, its bankers were playing with their own, and their partners', money. When everyone had a lot to lose, amazingly enough, the farm just didn't get bet. More to the point, nobody had any complaint with the size of the bonuses paid out at year-end.

But the game slowly changed into one of making absurdly leveraged bets with other people's money...first, from shareholders, and now, even from taxpayers. And that's when the bankers' compensation arguments started falling out of bed.

What we have to remember is that this OPM is the means of production... just as surely as the factories are for the car companies. And that, in turn, means that workers can't have a "right" to profits generated in one corner of the enterprise when the money providers, overall, are losing.

What we need is a return to a system of very smart people working very hard and making lots of money... while helping ensure that the overall enterprise also does well. We simply must head back towards the days of collaborative risk management, the absence of which has been a primary factor in the current debacle. And certainly we have to begin to institute changes to head off more drastic remedies, like government-mandated pay caps, which would simply drive talent out of the industry.

Regardless, what we cannot have is a system that pays out huge sums to individuals because isolated areas of an enterprise do well while the overall business stinks and the shareholders (willing an unwilling) suffer. Because that would be socialism. I think.

Comments

[Henry]

"Regardless, what we cannot have is a system that pays out huge sums to individuals because isolated areas of an enterprise do well while the overall business stinks and the shareholders (willing an unwilling) suffer. Because that would be socialism. I think. "

Bob,
For your edification, that is not socialism. The word shareholder implys annual meeting where the members of the board are elected. The board selects the CEO and on it goes. There is a fiduciary duty to the shareholders (you must know this Bob). If the members of the board and the ceo consort for filthy aggrandizement and emolument, the shareholders vote in new directors or there is the shareholder suit. Why would a company tolerate huge sums to individuals while the overall business stinks?? And how could you possibly be so uninformed to call that socialism? We all know that republicans like to call their adversaries sociialists or commies even though they do not know the meanings of the words, but they are the fools in that case. Your excuse?

[Beachrunner]

Wasn't the entire socialist movement, from the very start, a fearful, allergic reaction to capitalism and industrialization? Wasn't the longing for a powerful welfare state born from nostalgia for the idealized safety net of feudalism, with its certainty of social roles and obligations?

Didn't the notion of a benevolent government official, caring about the helpless masses, originate from the romanticized myth of a noble lord caring about his loyal peasants - without the anxieties associated with freedom to make individual life choices?

And wasn't it darkly ironic that apologists of such a backward, regressive idea chose to call themselves "progressives"?

[Henry]

I thought it was Jesus (the beloved of the right wing) who stated that you were your brothers' keeper. What a lovable, progressively, socialist he was, eh?

[BilCon]

Jesus stated that you were your brothers' keeper, not that the government should be our keeper. Charity should be individual, not collective.

Regarding the article,

>What we need is a return to a system of very smart people working very hard and making lots of money... while helping ensure that the overall enterprise also does well. We simply must head back towards the days of collaborative risk management, the absence of which has been a primary factor in the current debacle. And certainly we have to begin to institute changes to head off more drastic remedies, like government-mandated pay caps, which would simply drive talent out of the industry.

Regardless, what we cannot have is a system that pays out huge sums to individuals because isolated areas of an enterprise do well while the overall business stinks and the shareholders (willing an unwilling) suffer. Because that would be socialism. I think. <

These 2 paragraph boil down my personal opinion perfectly. Great Writing.

[robizio]

Mr Rice:

You are worried about "talent" leaving the industry if they aren't able to "mak(e) a lot of money". What talent? These people devised ever more complex methods of defrauding investors and accumulating risk while contributing nothing of value to anyone besides their own bank accounts. Why should these people make a lot of money? What great service do they provide which we want to encourage them to continue? Running a shadow economy which siphons profits from the real economy, and speculating wildly under the name of "investment" does not provide benefit to the population at large.

"What we need is a return to a system of very smart people working very hard and making lots of money... while helping ensure that the overall enterprise also does well."

That's a good description for what we need to see happen in the ENTIRE economy. And something that's not going to happen while Wall Street speculators skim profit and equity out without providing anything in return--in most places that's called stealing.

[Henry]

There is a fundamental economic definition of a "private good" and a "social good" (or service). A private good's utility is the sole domain of the person with demand money to purchase it. Think of an ice cream cone. A social good's utility is for the benefit and use of eash and every person in the market regardless of payment. Think of the security provided by the U.S. military. Yes.... the U.S. military provides us all with a "social good", security. Even the homeless downtrodden who pay nothing are provided this good. I think it was McCain himself who stated that if it quacks like a duck, it's a duck. It is time to grow up about this bashing of the word socialism. The U.S. Military is a socialist caste system. I cannot imagine anything more unAmerican. This assumes you can be honest about the meaning of words. (vexing problem for republicans)

[robizio]

Aye.

[laocoon]

McCain receives services from the government based on his need. If each of his eight houses have a break in next year, or his extensive wealth creates a greater need for police services to protect it he receives more services than a poorer person does. His needs are based on wealth and not scarcity but he receives in accord with his needs. Isnt this socialism. Almost all government is a form of risk or cost sharing. All government is socialism. It is just a question of what needs are addressed.

[Henry]

laocoon,
You sound like you recite the Marxist gospel of "from each according to ability to each according to need. " That has no relevance in the distinction between a private good and a social good in strictly economic terms. Think of this: Barack Obama sells the U.S. Interstate HiWay system to a Chinese Sovereign Wealth system for $2 trillion!. We take $2 trillion and payoff debt. Now the Chinese who own the roads charge us tolls. And they make some sneaky wwIII plans. Republicans are orgasmic because of this privatization. Gas taxes are dropped because it is the private owner who has to maintain the roads. But drivers are mega pissed as they find it costs them $70 to commute to work. Now... the elected government can choose to privatize the roads or keep them public. Public they are social goods, private they are private goods.... only use is use that is paid for. socialism is a social system that articulates a form of use and payment, government on the other hand is method, the process by which one social system vs another is permitted to exist. We have a democratic government that has chosen between a mix of private and social social systems. (my point is: all government is government. Socialism is in the domain of social system that can be selected by the government at the will of the people.

[Henry]

A lesson learned from the Great Depression era: stocks purchased with borrowed money in order to speculate on ever increasing values eventually led to a pop of inflated values. This led to the prudent regulation (conservatives should love this!!) of margin requirements.... so that at least there was some limit to the fuel (borrowed funny money) that pushes speculation.
We have once again been brought to the realization that funny-money financed speculation ends with everyones' euphoria dashed. Who to blame, who to blame.
The hedgies and their derivatives are the cool cats of financial renoun. Making billions producing nothing. It's so cool. It's king of like, well, that Madoff guy. Filthy rich with out contribution. Bubbles up, crashes down. It's the timing they need to work on. Time to make an example of them all.

[Erdgeist]

In some respects these Wall Street people are taking the 'prime directive' of capitalism to its logical limit. The first definition of "capitalism" comes from Louis Blanc's book, _Organization of Labor_ (1850). He defined it as the "appropriation of capital by some to the exclusion of others." As is easy to see, a bank robber, a con artist, and Bernie Madoff are all good capitalists who appropriated other's capital. (Historically, going back to Hamilton, the U.S. economic system was quasi mercantilist -- never capitalist in any sense of the term.)

[Rog49Thomas]

There's a fundamental difference between "national socialism" and socialism.

[arvay]

RE: "socialist vs. capitalist."

I think it's high time that we all stopped using this kind of language. Karl Marx' predications are about as predictive as Nostradamus, and his ideas led to the slaughter of tens of millions of people and economic collapse.

Now, "free market" capitalism has produced -- economic collapse. Some might add the slaughter of hundreds of thousands in Iraq for the benefit of favored contractors to its record. It had been working quite well for some time, but obviously was distorted into an unstable juggernaut.

So the application of some quasi-religious terms, i.e. "socialism" and "capitalism" are not going to help us comprehend this mess or fix it. They're only useful as a pejorative (socialism) or some form of divine grace (capitalism).

Lets just start by recognizing that all economic systems blend private enterprise with government action and regulation. Doesn't that feel better? Now we can discuss which measures might work or not.

[jschoder]

It's a little easy to blame the crimes of the 20th century "communist" states on Marx. He just wrote a economic analysis which clearly reflected the (at this time) current situation.

And if you blame him for the murder of Stalin and Mao then you also have to blame Adam Smith for the crimes of liberal/"free" captialism and Jesus for all the crimes commited by the catholic church.

But I have to agree with your basic argument, that what works shouldn't be judged by the name you give it (captialis­m/socialis­m/communis­m/anarchis­m) but by what works. And apparently the sovjet communism as the "free" market have both failed.

[arvay]

Yes, we're still arguing about quasi-religious concepts that only impeded progress.

I don't blame Marx personally, but his ideas did serve regimes that did horrible things. It's fair, I think, to see what the outcome of specific theories are. Galileo's ideas led eventually to modern astronomy. I don't know about Jesus' responsibility -- I suspect many current religious leaders would re-crucify him for his disruptive ideas -- but clearly monotheism is responsible for megadeaths.

[William Duell]

The free market has not failed--- Capitalism and free markets have created more wealth than Karl Marx ever thought possible.

[PhilipTaylor]

Banks took Massive Often Hidden Fees at every level of their Scheme and the Banks could have been healthy longer if they had not doled out so much to Executives, Middle Managers, and everyone else plus Big Dividends to the share holders.

The Profits from Hidden Fees in Derivatives among other means found their way into the pockets of these greedy employees. Basically a Labor UNION arguing they were indispensable then ruined the companies faster - The Union of the Wall Street Greedy.

Of course, the Ponzi Scheme would have done them in eventually if the Unions took less. Once the Housing-Hy­per-Inflat­ion Bubble Burst the companies would have collapsed anyway under the Weight of over a $Quadrillion in Toxic Paper Worldwide in all types of Toxic Paper.

NOW there is no hope of saving the ZOMBIE BANKS as their value is depleted and some have $Tens of Trillions in Debt that can not possibly be covered by the FED or the Government without ruining America!

So the End is Near Even if Obama listens to his Apostles of the Money Changers and tries to Bail them out.

[max08]

I'm all for driving the "talent" out of the industry. Because that "talent" got us here in the first place. DONT talk to me about "talent."

There is none.

[usedtowander]

Right.

I just don't understand the banker's complaints.

Take an example. NationsBank swallowed up Bank of America and then changed its name. The winners of the deal, the Charlotte guys, laid off thousands of California BofA people. That was Ken Lewis and the boys in Charlotte's Modus Operandi.

So, Ken Lewis and his superstars in Charlotte lose two-thirds of the value of the company. Two-thirds. They need an infusion of capital - just like the hundreds of ompanies they had taken over so many times.

The new owners, the people with the cash and capital, have a set of terms and conditions that go with the investment. They actually have the temerity to want management to cut stupid costs. The new owner is, however, really nice. Unlike Ken Lewis the new owners let the guys that screwed up horribly, actually keep their jobs! That's WAY different from what Ken Lewis did.

Turnabout is fair play. I just think the new owners - the American taxpayer - is being played by the incredibly poor management losers that have run the banks into the ground. Who knows what damages still lurk on the balance sheets? I think keeping the old operators around will just let them cover up and destroy the evidence of the extent of their damage.

[Riani]

Thanks, Bob, well put! I loved your analogies, makes even my economically impaired brain grasp the salient points.

[Social Construct]

These guys are like the neighbor that keeps borrowing his neighbor's tools that never seem to make it back to the owner.
Take that premise and amplify it by about a bazillion and you have a Wall Street banker.

[schatsie]

Let's face Reality, the top 400 people in this country took in 250 million a peice each and every one of them for a year... ONE MILLION DOLLARS A DAY......or 100 billion for the year and paid less than 20% in taxes....and that was adjusted income,,,,What do you imagine their incomes were BEFORE the adjustments....

Wall Street is the CANARY in the COAL MINE... We will never make significant process until these peoples unmitigated GREED is alleviated by 94% tax rate.....

[Crumbx]

This was exactly my point on another story. Starting with the adjustment of the tax rate from 70% to 55% under JFK (yup--he even campaigned on the issue of "tax fairness") and further reductions to 36^, the top money people in this country increased their salaries because, well, they could end up with 35% more. On the other hand, the rest of us had to sacrifice our salary increases to pay theirs. Thus, we now have a system where the bottom 50% of income in this country are doing worse than 1970. The money had to come from somewhere to pay the top people. Simple arithmetic.