Monday, October 31, 2011

Examining Profits über Alles as a Part of the Problem

The dialog around OWS is spreading and maturing, and the nation owes the die-hard protesters who have stuck it out through ridicule and nasty weather a debt of gratitude. That's not to say magical solutions have been found or enacted, but at least people are talking seriously about the system's flaws now and not childishly focusing on what the protesters are eating or where someone has to relieve themselves if they're camping outside.

Essentially, the triumph of OWS has been to raise awareness that people are dissatisfied with the current course we're on and to get everyone talking. But even still, though more people are seriously engaged in more meaningful conversations, easy answer are not readily available. The landscape is very complex.

For example, is it really the bankers we should be angry at? Nicole Lapin explains why that's perhaps oversimplified:
1. To get into the “top 1%” of Americans you don’t need to be a billionaire or millionaire or half-millionaire. The minimum wage earners in that group make about $343k/year.

2. Financial services professionals (a.k.a. “Wall Street”) average $311k/year — so they technically don’t make it into the top 1% if you look at the mean.
Or is it the CEOs? Nona Willis Aronowitz suggests they have more power to make real changes in everyone's lives than the bankers do:
[T]ax codes matter, but CEOs and boards are the ones making the salaries and doling out bonuses. They're the ones making obscene amounts of money for no particular reason—John H. Hammergren, the CEO of McKesson pharmaceuticals, made $131.2 million last year, 11 percent of the net income for a company that employes more than 36,000 people. They have the most direct power to redistribute the wealth and give their employees decent pay and benefits. [via Sully]
But, then, the bankers don't get off that easily in Tom Friedman's latest column:
Citigroup had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.

It doesn’t get any more immoral than this.
Indeed. It doesn't.

Unless your moral compass equates profits with true north.

For generations now we've had it drilled in our heads that profits are the ultimate good. They are the entire raison d'etre of any business. And if profits are good, then a lot of profit must be really good.

And, so we're told, this isn't selfish or greedy on the part of the business executives either. After all, we're reminded, repeatedly, how profits benefit shareholders...you know the proverbial little old lady with 8 cats on a fixed income who would perish were the CEO of MegaCorpaton Inc. not squeeze every last penny out of his employee's healthcare benefits that he could. The fact that the little old lady owns 50 shares of MegaCorpaton and sees $35 dividends a year (a drop in the bucket compared to what she annually sends her unemployed relatives struggling to put food on the table) is not really highlighted, but....

But, unemployment is actually good for profits too, it turns out. As Walter Benn Michaels notes in a brilliant essay (one of the Held Essays on Visual Arts, edited by our pal Jonathan T.D. Neil) published in The Brooklyn Rail, as a system Capitalism rather likes a certain level of unemployment because it increases profits:
Unemployment is both a problem and a solution. It’s a problem for the unemployed, who want work, a solution for employers who not only want workers but also want the cheapest ones they can get. If, say, you’re looking to hire a salesperson (the largest occupation in the U.S.), the reason you can get one for an average salary of only $12 an hour is because there are a lot of unemployed potential salespeople out there. Which means, in turn, that unemployment is not just a problem for people who don’t have jobs, it’s a problem also for people who do. If you’ve got that sales job, the unemployed are your competition; they may be worse off than you but you’re worse off because of them—they’re the reason you’re only making $12 an hour.
Of course, a lot of unemployment means far fewer consumers, so Capitalism likes to keep profits at what Milton Friedman called the “natural rate of unemployment.” But it gets even more complex, when you consider which people are willing to perform which jobs, as Georgia and Alabama farmers have found in the wake of their states' harsh anti-immigration laws.

Over the weekend, we saw the financial thriller (yes, I know...how improbable...but these are the times we live in) that's generating a lot of word-of-mouth buzz and deserves to receive widespread distribution. "Margin Call" is summarized this way on the movie's website:
Set in the high-stakes world of the financial industry, Margin Call is an entangling thriller involving the key players at an investment firm during one perilous 24-hour period in the early stages of the 2008 financial crisis. When an entry-level analyst unlocks information that could prove to be the downfall of the firm, a roller-coaster ride ensues as decisions both financial and moral catapult the lives of all involved to the brink of disaster.
I can report it's indeed thrilling. I felt like I had be punched in the gut by the end of the flick. [Spoiler alert] What really got to me, because I saw the stark truth in it, was a dialog between Demi Moore's character and Stanely Tucci's, both of whom were being let go from the firm. Staring in to the abyss and contemplating not only the repercussions of what was happening for themselves but the general public, Moore's character reflects on how they got there, at the point at which they chose to move forward with the decision that brought them down, and argues that at the time there didn't seem to be a choice. Tucci's confirms that it always looks that way.

In this scenario it looked that way because they were focused not on what was best for their clients or even what was best for the firm, but rather on what profits demanded of them. Indeed, it was the obsession with making money that destroyed the firm and ended up impacting millions, if not billions, of other people in the process. Even as the 24 hours unfolded and the executive decisions were being made, even as it was clear that the path they were choosing would end all their careers, their reputations, harm so many other people, and most likely bring down the firm, they kept focused on the clarion call of the industry's prime directive: profits über alles. Get what you can for yourself while the getting is good.

If you're looking for the baby, it's out there with the bathwater.

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15 Comments:

Blogger Joseph Giannasio said...

Well said

although you did buy into some misdirection

is it really the bankers we should be angry at?

I don't think OWS is just about Bankers, Wall Street is about, well think Gordon Gecko whatever the f@$k he is suppose to be.

10/31/2011 03:15:00 PM  
Anonymous Anonymous said...

Today's news about MF Global and the huge toxic package that JP Morgan sold knowing what crap of theirs it was holding made me feel like I was watching Margin Call again this morning.

----ondine nyc

10/31/2011 08:14:00 PM  
Anonymous Franklin said...

Essentially, the triumph of OWS has been to raise awareness that people are dissatisfied with the current course we're on and to get everyone talking.

Do you agree that the Tea Party protests were a triumph for the same reason?

As Walter Benn Michaels notes in a brilliant essay...

If you thought that was brilliant, you should read economics writings by people who aren't professional literary theorists. They'd blow your mind.

The unemployed, conceived literary-theoretically as a social class, are not driving wages for retail sales downward to $12/hour. Competition for $12/hour sales jobs is, which comes from some of the unemployed, and some of the employed who are working for less than $12/hour and could also do that job.

Meanwhile, there are pressures driving that rate upwards to $12/hour. Employers have to pay enough to attract people who are willing and able to do good work for them. They're competing against other businesses who could take their best salespeople away if they don't pay them enough.

I don't think OWS is just about Bankers, Wall Street is about, well think Gordon Gecko whatever the f@$k he is suppose to be.

Your ideas are intriguing to me and I wish to subscribe to your newsletter.

11/01/2011 10:06:00 AM  
Anonymous Anonymous said...

Just maybe.


http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8844646/World-power-swings-back-to-America.html

Do you think Jay Jopling and Chef Ramsay are long lost brothers?

11/01/2011 10:15:00 AM  
Blogger Edward_ said...

Do you agree that the Tea Party protests were a triumph for the same reason?

Well, they did make me take notice. Sure.

I'm not certain I came away thinking they had anything new as a proposed course of action. Their calls or action were based on hating big government, being isolationist, praising the wealthy even though few of their members were among them, and a rather fundamentalist/originalist interpretation of the Constitution (which is ironic in IMHO an unAmerican way, given how it was designed to change with the times). This all sounds like a reiteration, albeit a passionate one, of a staunch ideology, rather than a response to a particular set of circumstances.

Further, it's hard for me to believe this astroturf movement would have gained much traction had not some big corporate money been behind it. So although I think many of its participants were genuinely frustrated and a few were sincere in thinking less government, less taxes, and an America more like the one they grew up in (which just so happened to be one in which it was much, much easier for straight white men to get ahead) would help solve our economic woes, I was too skeptical they were being manipulated (against their best interests) to give them a fair hearing, I suppose.

If you thought that was brilliant, you should read economics writings by people who aren't professional literary theorists.

Ugh...really?

Putting that gratuitous potshot aside...

Would the economists who aren't professional literary theorists say competition get better or worse as unemployment rises? If, as reason would suggest, they'd say it gets worse, then higher unemployment as a standalone, measurable factor would indeed seem to drive down wages.

11/01/2011 10:55:00 AM  
Anonymous Franklin said...

I'm not certain I came away thinking they had anything new as a proposed course of action.

Nothing I've seen proposed as a course of action coming out of the OWS strikes me as new. Periodic elimination of debt, for one, goes back to the Old Testament. I'd like to know what OWS proposals you think are new. Because they seem to based on an equation of wealth with moral failure as implied in the New Testament and applied on a liberal template with fond memories of Marx. It also seems that one could refute OWS-inspired propsals one at a time (starting with "let's run the Jew bankers out of the country" - now there's an idea with an established pedigree!) - and never get to the "real" proposals, because, basically, there are none.

The economists who aren't professional literary theorists wouldn't characterize competition as getting "better" or "worse." They'd describe it as increasing or decreasing. As for its effect on wages, it depends on what's causing the unemployment. If a ton of capital has been misallocated into General Motors so it can continue making lousy cars, or into the big finance houses to prevent the economy from crashing this week, then the jobs that would have been created to compete against these farces of capitalism simply aren't getting created. Reduced competition in those cases is destroying wage-earning. Given the limited parameters of a smaller number of $12/hour retail sales jobs relative to the number of people who want them, you could say that unemployment drives down wages, but you could as easily say that higher wages drive up unemployment, because they reduce the employers' ability to hire. So does Michaels want higher wages, or more employment? Here's where literary theory isn't so helpful.

11/01/2011 01:58:00 PM  
Blogger Edward_ said...

You're going make me run out of "Ugh...really?"s if you keep this up Franklin.

Do you really want to suggest that one bigot in Los Angeles typifies the OWS protesters across the nation? Would you like me to cherry pick one of the choice statements by Tea Party participants, or can we just agree that such protests attract their fair share of nuts and flakes despite the political side of the fence they're on?

As for "I'd like to know what OWS proposals you think are new" I'll redirect you back to the Friedman link I provided and his suggestions (only one of which is tongue in cheek):

We need to focus on four reforms that don’t require new bureaucracies to implement. 1) If a bank is too big to fail, it is too big and needs to be broken up. We can’t risk another trillion-dollar bailout. 2) If your bank’s deposits are federally insured by U.S. taxpayers, you can’t do any proprietary trading with those deposits — period. 3) Derivatives have to be traded on transparent exchanges where we can see if another A.I.G. is building up enormous risk. 4) Finally, an idea from the blogosphere: U.S. congressmen should have to dress like Nascar drivers and wear the logos of all the banks, investment banks, insurance companies and real estate firms that they’re taking money from. The public needs to know.

11/01/2011 02:21:00 PM  
Anonymous Franklin said...

I'm not saying that one bigot in L.A. typifies the OWS protesters. I'm saying that no one does, which is of no consequence, and no idea does, which rather does have consequences. There is a typical sentiment, and that is that the rich and powerful owe something to the non-rich and non-powerful. Like any sentiment, it is in some ways true, and in many ways not. Deciding on that "something" has turned into quite a problem for the prime movers of OWS. I think that problem is being glossed over by its supporters, here included.

Tom Friedman now speaks for OWS? I'm sure some people would be surprised to hear that. At any rate, #1 was proposed by a Cato Institute principal 19 months ago, #2 is Glass-Steagall, passed in 1933, and #3 is redundant to a slew of lawsuits already underway on behalf of parties damaged in exactly those derivatives markets - fraud has always been illegal. This is newness to you?

11/01/2011 03:48:00 PM  
Blogger Edward_ said...

you're being intentionally difficult

I said that OWS has launched a conversation...Friedman, in the context of an article discussing OWS made his suggestions..

what's so hard here?

11/01/2011 06:12:00 PM  
Anonymous Franklin said...

You also said about the Tea Party protesters that "I'm not certain I came away thinking they had anything new as a proposed course of action." So I'm asking what you've heard from the OWS protesters that is new as a proposed course of action.

11/01/2011 06:56:00 PM  
Blogger Edward_ said...

I'll admit the suggestions were only spurred by the OWS protest and ask you to help me find suggestions spurred by the Tea Party protests.

11/02/2011 07:39:00 AM  
Anonymous Franklin said...

You mentioned some of them yourself, albeit unkindly: reduce the size of government, stop trying to police the world and bring the troops home, evaluate new legislation first and foremost for its Constitutionality, and lower taxes. There were others as well: stop the bailouts, return to the gold standard, and abolish or at least audit the Federal Reserve. My favorite suggestion was a Tea Partier whose sign read, "Read Thomas Sowell."

11/02/2011 03:29:00 PM  
Blogger Edward_ said...

UPDATE: There is a really good start for a meaningful discussion over at Sully.

As he notes, even though you can lay significant blame on the Community Reinvestment Act for the rash of imprudent mortgages, it wasn't only that Act or the Fannie's that led to the collapse, but a combination of circumstances, none the least of which was greed:

The Community Reinvestment Act of 1977 did not cause the meltdown of 2007, in no small part because that law didn't apply to the private lenders who dominated the subprime market. The fraudulent practices of those lenders and the financial derivatives the private investment houses used to turn the subprime market into an elaborate game of hot potato were left unregulated by the federal government

The best Sully offers counter that position is this:

The banks created the "shady financial instruments" solely BECAUSE Congress passed laws that forced them to take high risks that they knew would result in massive losses... The banks did what any business would do (albeit in a deceptive, but legal, way): they protected their profits. Granted, their methods SHOULD have been illegal, but that's what happens when Congress and bureaucrats start dictating policies to businesses... the businesses consult with their lawyers and they start to get creative.

Again, though, even taking that as "truth," we see where a culture of Profits über Alles contributed to actions that were ultimately NOT in the banks' interests.

11/02/2011 03:33:00 PM  
Anonymous Franklin said...

Greed is only limited by fear of bad consequences. If there are no perceivable bad consequences to a financial maneuver, greed is effectively limitless. If there is a federal guarantee upon half of all subprime mortgages, as there was in 2004, fear of bad consequences that should be attached to trillions of dollars' worth of equity are not even a gleam in a quant's eye.

And I'd be careful about accusing other people of greed. Assuming you're not so foolish as to claim that you're free of greed yourself, the ensuing question is what distinction makes your greed tolerable and theirs intolerable. That's not such an easy question to answer.

11/02/2011 07:21:00 PM  
Blogger Edward_ said...

The bad consequences take shape from bad decisions and I would argue it's moral fiber that limits greed not fear. More specifically, greed is not IMHO defined by wanting more (more than you news, more than your fair share, nor even more than others think you're entitled to) but rather by making stupid or amoral decisions in pursuit of more.

11/03/2011 07:22:00 AM  

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